When the economy is in crisis, the Federal Reserve Bank eases monetary policy to help stimulate the economy. They have done this in the last 18 months in face of the pandemic’s impact on the US economy by lowering interest rates and buying bonds. This is what people call the Fed being dovish. But the Fed may to be headed in a more hawkish directions sooner than many expected.
JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote this today about the Fed…
At its September meeting, the FOMC delivered a slightly hawkish message, recognizing slower economic progress due to the Delta variant, but also robust improvement in the labor market and somewhat stickier inflation than it previously assumed. This is reflected in the Fed’s updated Summary of Economic Projections, which shows a downgrade to its growth estimate from 7% to 5.9% for 2021, further upward revisions to its inflation estimates and a reduction in the speed of labor market recovery it expects this year.
However, the Fed remains optimistic and expects growth and employment to re-accelerate in 2022. Along with its positive view on the economy, the Committee has also shifted to a more hawkish stance on monetary policy. The median dot plot now suggests the potential for liftoff by the end of 2022 and three rate hikes in both 2023 and 2024. Perhaps most notably, the Fed also gave the first official signal that tapering its bond purchases could “soon be warranted,” suggesting a tapering announcement in November is now very likely.
Looking forward to 2022 and beyond, the Committee sees the pace of policy normalization hinging on the speed of labor market recovery, given substantial progress on its inflation goal. Further, while the Fed is preparing to take its foot off the monetary accelerator, policy will remain accommodative for quite some time. This should continue to support equity markets, but also lead yields to grind higher as economic growth and inflation expectations remain robust.