Inflationary trends have carried the U.S. economy into the holiday season, leading to much speculation as to how policy makers and regulatory officials will handle rising prices in the coming year. Today finally brought some long-sought answers as the Federal Reserve met to discuss the economic challenges ahead. In the weeks leading up to now, the Fed taper has been a hotly debated topic. Tapering refers to the process of scaling back asset purchasing. Moreover, this is a policy decision that often leads to tightened monetary policy, such as increases in interest rates.
It’s worth noting that plenty of speculation has risen around Fed Chairman Jerome Powell delaying plans for a taper due to the increasing threat to the U.S. economy posed by the spread of the omicron variant. Some economic commentators, such as Mohamed A. El-Erian, suggested that he should go beyond the taper rate that was expected due to mounting annual inflation.
In preparing for the Fed Taper meeting, investors across the country have been bracing for the higher interest rates that many have considered inevitable. While the dust is still settling, here are three Federal Reserve announcements from today that everyone should consider.
1) Interest rates will rise.
For anyone concerned with interest rate hikes, they will be coming. As the New York Times reports, the economic projections issued by the Fed include three rate increases that can be expected throughout 2022. Additionally, as the economy recovers, rates will likely increase along with it, rising t0 2.1% by the end of 2024. That’s from the current target range of 0% to 0.25%.
As the central bank issued in a statement, this target range for interest rates will likely be necessary “until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment.”
2) Bond buying will stop.
We may see the monthly bond-buying trend come to a halt. According to a policy statement released today with the Fed’s economic projections, the tactic employed by the central bank during the pandemic to boost economic growth may cease as soon as March 2022. The statement released cited the inflationary trends and labor market developments as the primary motives behind this decision.
In a press conference following the Federal Reserve meeting, Powell reaffirmed this. He stated that the decision to reduce asset purchasing had been spurred by the Fed’s focus on “strengthening labor market and elevated inflation pressures.”
This decision will also allow the Fed to move forward more quickly in its plan to raise interest rates.
3) Asset valuation is key.
Powell has recognized that many households are in decent, if not strong, shape financially. However, he also realizes that businesses are facing a much more difficult economic landscape. Indeed, the road ahead looks challenging. He emphasized that asset valuation is one of the key areas examined by the central bank when it is concerned with assessing financial stability and risk. He described current asset valuations as “somewhat elevated.”
Powell also noted that while funding risk among financial institutions remains low, the Fed considers money market funds a vulnerability.
Despite the economic complications posed by the aforementioned challenges, there are still stocks that stand to benefit from the Fed taper delays.