The last FOMC meeting of the year came to an end. In addition to the outcome of the meeting, we are excited to see how it will affect the market in the future. History and experience show that indices are expected to perform well during the taper phase. In the meantime, we believe that mega-cap tech stocks and value stocks are still sources of great returns.
As for the interest rate, the Federal Reserve Open Market Committee decided to leave the target range for the federal funds rate at 0-0.25 percent at this meeting. With regard to asset purchases, the committee decided to slow the monthly pace of its net asset purchases by $ 20 billion for government bonds and $ 10 billion for agency mortgage-backed securities. Starting January, the committee will increase its holdings of government bonds by at least $ 40 billion per month and of agency mortgage-backed securities by at least $ 20 billion per month. On the economic outlook, the Fed added that “employment growth has been solid over the past few months and the unemployment rate has fallen significantly” and removed the statement that “inflation … largely reflects factors that are expected to be temporary “.
The rate projection dot chart suggests that all committee members expect rate hikes in 2022 and 12 members expect at least three rate hikes by the end of next year. As for the economic outlook, the Fed has further lowered its growth forecast for 2021 and raised its inflation forecast significantly. GDP growth of 5.5% is now forecast for 2021, while in September it was 5.9%, an unemployment rate of 4.3% and in September 4.8% and a PCE index of 5.3%. , which amounted to 4.2% in September.
The Fed has generally reached tentative consensus to curb inflation and is no longer taking any risk. The above actions by the Fed are primarily intended to restore its reputation rather than essentially dampening economic expansion. In addition, the scatter plot does not represent the final monetary policy decision about the interest rate as no one knows exactly what will happen in the future. Should inflation fall in the next year or economic performance lag behind expectations, the Fed could still adopt an accommodative approach.
Despite a restrictive turn by the Fed, the expectation had largely been priced into the market before the Fed meeting. The market actually reacted positively, especially after Powell’s speech, pushing the three major indices up. This shows that when compared to a faster withdrawal of stimulus measures that could raise concerns about limited liquidity and growth, the market prefers the Fed’s policies to contain inflation, especially short-term inflation expectations, as the latter will be higher Risk to the market in the event of it spiraling out of control. Therefore, the advantages outweigh the disadvantages, so to speak. And a clear political turnaround also benefits the market from the fact that expectations are anchored on more concrete paths instead of floating political expectations.
Monetary policy alone can never be the core factor in completely reversing the trend in US stocks, be it in the tapering phase or in anticipation of interest rate hikes. After all, US stocks are making solid gains and are the mainstay of the market. Spinning inflation is a potential risk that will lead to monetary policy tightening faster than expected, in which case not only will market expectations need to be revised, but the rapid rise in interest rates will also have a major impact on the market. All of this actually depends on the Omicron situation. If Omicron causes mild illness, as it is now, it won’t be a complete reversal of the current trend of minor improvements in global supply chains and price pressures since the delta breakout, although disruption and stagnation are difficult to avoid.
History shows that before an actual rate hike, US stock indices typically maintain an uptrend and developed markets outperform emerging markets. We believe that mega-cap tech stocks and value stocks still offer better returns.
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