Hello Fed, How's Your QE Asset Taper Trial Balloon Doing?



Stock Market Performance 2021-01-18

Let's check in on the market's reaction to the idea that the Fed may "discuss", not do, asset purchase tapering and hike rates.

The WSJ notes a selloff in the stock market after Bullard issued a rate hike trial balloon

The Dow Jones Industrial Average lost 1.6%, or about 530 points, in 4 p.m. trading Friday. The index of blue-chip stocks dropped more than 3% this week. 

Policy makers had signaled Wednesday that they expect to raise interest rates by late 2023, sooner than they had previously anticipated. Sentiment waned again on Friday after Federal Reserve Bank of St. Louis leader James Bullard said on CNBC that he expects the first rate increase even sooner, in late 2022.

The Fed has faced more inflation than it expected, and policy makers need to be nimble, he added. But it will take several Fed meetings to organize the debate over tapering its bond-purchase program, he said.

It isn’t surprising that equities are falling, said ThinkMarkets analyst Fawad Razaqzada. U.S. stocks have hit a series of record highs and have been outpacing the economic recovery since last year. Now traders are repricing that “reflation trade” as they watch the Federal Reserve slowly start to alter its stance on monetary policy.

It was coming,” he said. “This kind of selloff was coming because the market got ahead of itself.

Got Ahead of Itself?!

What a hoot. Yes, indeed, by light years in fact.

Fed’s Bullard Pencils In Rate Increase in 2022

In addition to tapering talk, please note Fed’s Bullard Pencils In Rate Increase in 2022

Speaking Friday on CNBC, Mr. Bullard said that when he submitted forecasts at this week’s Federal Open Market Committee meeting, “I put us starting in late 2022” with the first move up from near-zero short-term interest rates currently. Ahead of the FOMC meeting, Mr. Bullard had said he wasn’t ready to call for a shift in monetary policy while the coronavirus pandemic was still a major force for the economy.

Mr. Bullard doesn’t currently have a vote on the FOMC, and he was the first official to weigh in after this week’s meeting. Seven of 18 Fed officials expect one or more increases next year.

Despite that shift, Fed Chairman Jerome Powell at his press conference after the FOMC meeting cautioned that “rate increases are really not at all the focus of the committee” right now. “The real near-term discussion that we’ll begin is really about the path of asset purchases” and when the central bank will be able to pull back on that, he added.


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