The Federal Reserve statement is going to take the first step away from the simple policy that it had introduced to combat the pandemic. This is a milestone on the path back towards normalcy. The Federal Reserve statement is going to come after a prolonged meeting in the middle of the week. The Federal Reserve statement is going to be a crucial event for markets in the week ahead. The Federal Reserve statement is expected to announce that it will roll back the $120 billion in monthly bond purchases and finish the program by the middle of next year. The economic data will also be vital. This is because the October jobs report will also come this week. There are lots of earnings expected, including from pharmaceuticals such as Moderna and Pfizer. There is also a host of tech, insurance, energy, and travel firms.
The Bank of England will also meet later in the week. It is going to increase the interest rates. This comes after the rate increased in Norway, South Korea, and others. Peter Boockvar, CIO of Bleakly Advisory Group, said, "The Fed is part of a global movement to remove accommodation, and the market drives right past that. In a way, the stock market is playing a game of chicken with this inflation move, interest rates, and the response from central banks. There is an incredible level of complacency out there in this environment. Earnings overall have been good, but there are still a lot of profit margin challenges out there. There is no better example than Apple and Amazon." There have been a few high-profile misses. This includes both Amazon and Apple this past week. Both their shares decreased, which weighed down the Nasdaq the previous week.
Inflation has been going at its highest in the past three decades. The core PCE inflation is the preferred gauge of the Federal Reserve. It increased 3.6% in the previous month on a year-on-year basis. This is the same level as it was in August. Other events the market is looking out for include meeting the world leader in Italy for the G20 and the COP26, the United Nations climate summit that is beginning in Scotland from this Sunday. Michelle Mayer, an economist with Bank of America, said, "The upcoming FOMC meeting will be important for three reasons: 1) the announcement of tapering; 2) guidance around what tapering means for the path of hikes; and 3) nuanced changes in views around inflation risks given recent data. The statement that announces the new pace of asset purchases will be followed by a note regarding flexibility stating that asset purchases are not on a pre-set course and will depend on the outlook for the labor market and inflation, as well as an assessment of the efficacy of asset purchases."
Michael Schumacher of Wells Fargo said, "You are going to have a wild week. The inflation commentary is a lot more important. Powell has sounded concerned about expectations getting baked in. The direction is right, but the speed is wrong." He said that the Federal Reserve statement would dominate the week. The job report will be of secondary concern. Experts say that 390,000 jobs were added in the previous month, and the usual hourly earnings increased by 0.4%. Payrolls are expected to increase by only 194,000 in the previous month. Schumacher said that inflation is the topmost concern in their markets. So, the wage data will be very closely seen. He added that the market is broadly expecting the Federal Reserve to say that it will decrease its bond purchases by $15 billion each month. This is going to start either this month or the next month.
The Federal Reserve implemented its $120 billion bond-buying programs early in the previous year. This was when it decreased rates and introduced programs to purchase a range of assets to keep the markets liquid. Now the program is being rolled back. Federal Reserve Chairman Jerome Powell said that inflation is the most crucial part because it will drive interest rate expectations. But he predicted that the central bank would not automatically increase interest rates when the bond buyback ends in the middle of next year. Traders are pricing in more than two interest rate hikes next year. But in the latest forecast from the Federal Reserve, only half the central bank officials have agreed that there should be even a single one. He also noted that the market expectations for rate increases might be overdone. He does not predict any movement until the beginning of the year following the next one.
Krishna Guha, the vice-chairman of Evercore ISI, said, "We are entering a new phase in the dance between policy and markets. The start of tapering increases the risk of yield spikes. It changes the balance of optionality between policymakers and risk-takers in ways that may weigh on equity volatility and risk premia, even as ultra-low longer-term yields continue, for now at least, to provide support for risk." Luke Tilley, the chief economist of Wilmington Trust, said, "All of the Fed statements until now have been designed and intended to build the expectations of $15 million a month – they would not want to surprise markets next week and risk having a taper tantrum. The Fed is just getting the tapering underway at a quick clip and preparing to raise rates should inflation persist. This is just a gentle initial move."
The comments by Powell will be closely seen for any adjustment in his predictions on inflation. The Federal Reserve had said that the increase in interest rates was temporary or transitory. The consumer price index has been above 5%, and the core CPI was nearly 4% last month. Kathy Jones, Charles Schwab's chief fixed-income strategist, said, "I think the Fed has pretty well determined to start the taper pretty quickly. We expect them to announce it next week and then start it soon after that, so that is pretty well carved in stone. I think the big debate now is how quickly the Fed moves toward actually raising rates. The expectation in the market has shifted to expect as many as two rate hikes in 2022 and 2023 ... that is a pretty aggressive pace of tightening."
The Federal Reserve Statement May Hold the Rates Longer
Weaker-than-expected 2% growth in the gross domestic product in the third quarter could help the Federal Reserve convince the markets that intend to maintain the lower rates for a longer period. Chris Gaffney, TIAA Bank president of world markets, said, "The general feeling among central bankers and the major central banks is that the inflation rate will come back down. Nobody is using 'transitory' anymore, but they do not feel like we will have prolonged high inflation. As long as they stay accommodative, I think the recovery continues. I am fairly bullish about the markets going forward. We will certainly see a lot more choppiness. However, I still think of the global economy. The U.S. economy, particularly, is right now a great environment for corporations. We see fairly positive earnings reports, and more importantly, expectations for future earnings."
Central banks around the world are trying to give a new message to the financial markets. The message is that they are not unaware of the increase in inflation and the risk that it may become more than just a temporary problem. The job report is also going to be very closely watched for economic indicators this week.