What Will The FED Do Next? For FX:US30 By KironKavanagh

Markets are preparing for the Federal Reserve to detail its long-awaited plan to bring one of its pandemic-era economic support measures to a close.
Investors expect that Fed Chairman Jerome Powell on Nov. 3 will outline how and when the central bank will begin to wind down $120 billion in monthly securities purchases. The plan will likely be agreed to during the two-day November meeting of the rate-setting Federal Open Market Committee.

Since the Fed’s asset purchases began, stocks have risen to new highs and bond yields, which move opposite to prices, have climbed from their pandemic-era lows. Market watchers anticipate the rally will continue through at least the end of the year, boosted by the Fed’s well-telegraphed plans.

The FOMC meeting should set the tone for equities and bonds through the rest of the year.

Pace of tapering

Rather than risk a taper tantrum in the bond market or boost volatility in equities, Powell has been careful to telegraph the gradual tightening of the central bank’s ultraloose monetary policy , put in place in March 2020 in an attempt to blunt the economic impact of the pandemic.

During September’s FOMC meeting, Fed officials discussed a plan that would reduce purchases by $10 billion per month for Treasurys and $5 billion per month for mortgage-backed securities. The plan could end these purchases by mid-2022, but the minutes note that “several participants” want these securities purchases to be tapered at a quicker pace.

The Fed’s monthly securities purchases and maintaining interest rates at near 0% have been a windfall for equity markets, propelling the S&P 500 , Nasdaq and Dow Jones Industrial Average to new record highs.

I think that market participants have already integrated the tapering scheme.

Other considerations

Investors are also closely tracking the Fed’s plans to raise interest rates. Powell has stressed that the end of tapering will not be tied to a hike in rates. Half of the FOMC’s 18 members expect rates to rise at least once in 2022, and an increasing number of investors believe the first hike could come in the summer.

I expect the impact on tapering to be less so than the first rate hike, which typically causes short-term volatility .

Meanwhile, the Fed’s bond purchases have increased the central bank’s balance sheet to nearly $8.6 trillion, up from $4.2 trillion at the start of the pandemic. Economists have warned that the Fed’s holdings are propping up markets.

If the Fed tapers its purchases by $15 billion per month, as expected, its balance sheet will rise above $9 trillion by the time it completes its asset purchase program in June 2022