Federal Reserve Decision: Hottest Topic on Wall Street Today

The final policy update of 2021 will be accompanied by new quarterly economic projections and interest rate forecasts.

In September, the Fed’s projections showed officials were divided on whether to lift rates at all in 2022, with the so-called “dot plot” indicating just one rate hike in 2022 and three in 2023.

Investors expectations

Fast forward to today, insiders are now expecting three rate hikes in 2022 and perhaps even four. Most also anticipate the Fed will quicken the pace of its asset “taper” from the current $15 billion per month reduction to as much as $30 billion per month starting in January.

At that rate, the Fed’s bond-buying would end around March of next year. Fed Chair Jerome Powell will follow up the policy announcement with a press conference at 1:30 p.m. CST. Any way you want to slice it, many large Wall Street investors are coming to realize the Fed can no longer play around with “inflation,” and they have to send a clear market signal that they are willing to do whatever it takes to put out the fire.

Bulls want to hear reassurances that the central bank will remain somewhat flexible and willing to adjust its plan according to evolving economic data. But keep in mind, the latest bit of data, the Producer Price Index for November, came in hotter than expected yesterday at +9.6%, with the monthly pace of gains nearly doubling from October.

Covid influence

Likewise, consumer prices are at a 40-year high of +6.8%, more than triple the Fed’s target rate. While most economists, including most Federal Reserve officials, agree that inflation should no longer be considered “transitory,” anxieties about the central bank moving too far, too fast have been intensifying amid surging Covid cases. The wave currently sweeping the U.S. is being driven by the Delta variant, but Omicron variant cases have increased 7-fold in just the last three weeks. Moreover, there are increasing economic concerns with Omicron thought to be as much as 4-times more transmissible.

I should mention, it has been exactly one year since the first Americans received their first Covid vaccination. Today as a nation, Americans are just a little over +64% fully vaccinated.

Reports are circulating that several large Chinese manufacturing companies have recently shut down operations in Zhejiang, one of China’s biggest manufacturing areas, because of new virus cases. This is undoubtedly something the market will be watching closely in the days and weeks ahead.

In addition to the Fed’s announcement, investors today will also be digesting a slew of other key data, including Retail Sales, Import/Export Prices, Business Inventories, the NAHB Housing Market Index, and Empire State Manufacturing. I should also mention that Russian President Vladimir Putin and Chinese President Xi Jinping have scheduled a video call and discuss energy and various trade agreements. Some say China will soon be approving Russia as a supplier of grain and other natural resources and raw materials. Russia and China appear to be getting a bit closer, which will undoubtedly make some of the macro geopolitical investors more nervous. Stay tuned…