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Market Nearing Pivot Point

All eyes will be on Fed Chairman Jerome Powell tomorrow, anxiously waiting for his comments after the December Federal Open Market Committee call. The Fed is expected to taper its bond purchases and pencil in the timeline for rate hikes. Beyond the general expectation for a tilt toward a more hawkish stance by the Fed in the post-meeting news conference Wednesday, many investors will look for clues from Chairman Powel on the following open-ended questions:


1. Will there be a dovish taper? In November, the Fed announced it intends to reduce its asset purchase by $15 billion a month. The number has fluctuated between $15 to $30 billion a month in the past week. Reducing bond purchases by $30 billion a month or more rather at a pace of $15 billion a month would end the asset purchase by mid-March 2022, months earlier than initially planned. The action would be a hawkish taper. However, the Fed may be accommodating and announce a reduction in purchases by $20-25 billion. The action would be a dovish taper since the longer it takes to unwind the stimulus, the latter the rate hikes.


2. What is the Fed’s dot plot? Many will be looking for the Fed to update their quarterly dot-plot chart, which tracks the Fed’s interest rate projections. The rate hike path will give investors an indication of the degree of hawkish or dovish among the Fed officials. At the start of the fourth quarter policy, watchers penciled in a total of six hikes by the end of 2024, resulting in the benchmark rate rising to around 1.8%. With the highest inflation in nearly 40-years, the Fed may need to accelerate the pace of the tapering and the subsequent rate hikes. Estimates now call for the Fed to implement a total of nine rate hikes over the same timeframe, placing the benchmark rate closer to 2.5%. Will this be the new goldilocks level of not too hot (expansionary) and not too cold (restrictive)?


3. Will the Fed finally change the word “transitory” to describe the inflation outlook? Will the Fed turn to a message implying the inflation rate is a one-time adjustment/aberration due to an external event (pandemic)? Or will Fed call inflation elevated and emphasize the need to take necessary measures to contain rising prices? Maybe, the Fed will drop the transitory messaging altogether and turn to a new word such as persistent?


4. Omicron variant and its implication on the U.S. economy? The rise in the Omicron variant cases over the winter months could lead to more lockdowns, exacerbating inflation and supply-chain problems. The outcomes could place the Fed in a difficult situation, navigating high inflation amidst a slowing economic environment. Barring another global lockdown that may restrict an economic recovery, the Fed will likely err on the side of caution and proceed with the stimulus drawdown even as the new virus threaten to bring on new restrictions.


Fed’s two key mandates remain - keeping prices stable and maximum employment. With the labor market progressing toward full employment, the Fed will pivot to bringing inflation under control.


Below is another technical review of the bond, dollar, commodity, and stocks. The technical exercise seeks to uncover the intermediate-to-longer term trends of interest rates, currency, commodity, and stocks for clues to the U.S. economic outlook (i.e., inflation, disinflation, deflation, stagflation, etc.).


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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