The Fed accelerates its tapering and signals rate hikes … why the market is climbing … a “disaster” of a retail report

 

Today, the Fed announced it’s doubling the pace at which it winds down its asset purchase program.

Rather than tapering at a pace of $15 billion per month, the Fed will now increase that amount to $30 billion per month.

This effectively means the original targeted end date of the program, June 2022, has now been pushed up to March.

The greater significance of this acceleration is that it paves the way for the Fed to start raising interest rates next year – potentially several times.

In the past, the Fed said it wouldn’t change its interest rate policy until after ending its bond-purchase program. And in fact, this afternoon, the Fed signaled that higher rates are coming.

From Yahoo! Finance:

All of the 18 members of the FOMC said they could see the case for at least one rate hike next year, a noticeable revision up from September projections showing a 50-50 split on a 2022 rate hike.

The updated dot plots, which map out each of the FOMC members’ projections for where rates will be in coming years, shows the median member of the committee projecting three rate hikes next year, another three or four in 2023, and another one or two in 2024.

***The driver behind this policy shift is inflation, which has been running hot for months, hitting the highest levels in four decades

From the FOMC statement:

Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to elevated levels of inflation.

In an acknowledgement that inflation is no longer “transitory,” notice how the Fed is now using the word “elevated.”

Despite this elevated inflation, the Fed is still looking to employment to inform its decision as to when to begin hiking rates.

From The Wall Street Journal:

Officials in their postmeeting statement described their goal of inflation moderately exceeding their 2% target as being met and said they would keep rates near zero until they were satisfied labor market conditions were consistent with maximum employment…

Officials now expect the unemployment rate to fall to 3.5% next year, below their long-run estimate of 4%…

And in the post-meeting news conference, Fed Chair Powell said:

Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy.

***As I write Wednesday afternoon, the markets are climbing on the news

After being down substantially this morning, all three indexes are up. Even the Nasdaq, which was down roughly 1% earlier today, has recovered losses and is up 1.6% as I write.

What’s behind the strength?

I reached out to our hypergrowth specialist, Luke Lango, for the answer.

Here’s his take:

Sometimes, all the market wants is some certainty, and the Fed delivered that today.

It really doesn’t matter what they said. As it were, the Fed is targeting three rate hikes in 2022 and will aggressively wind-down its bond-buying program — two things that were widely expected.

But that’s not the big news. They could’ve said two rate hikes — or four rate hikes — and the market still would’ve rallied.

Why? Because go-forward Fed policy for 2022 has gone from being an “unknown” to being a “known.”

As of yesterday, we didn’t know to what extent the Fed was going to combat inflation in 2022. Now, we have some guideposts. Uncertainty has become certainty, and uncoincidentally, selling pressure has turned into buying pressure.

We fully expect this renewed certainty on Fed policy for 2022 to put an end to recent market volatility and a create stable foundation upon which stocks can and will head higher next year.

Legendary investor, Louis Navellier, had a similar perspective, saying that “essentially, all the Fed is doing is getting more in synch with market rates.”

But perhaps there’s another reason why today’s Fed announcement didn’t lead to massive volatility…

***No longer the “Grand Master” of the financial market

I also reached out to our macro specialist, Eric Fry, for comment on today’s Fed decision. His perspective was interesting, providing a different slant on the stock market recovery this afternoon.

From Eric:

While today’s decision from the FOMC is an important one; it is probably less important than most investors believe. That’s because the Fed is no longer the Grand Master of the Financial Market that it has been historically.

Today, it is more like the Wizard of Oz, which pulls a few levers here and there to put on a big show, while hoping the markets play along. But many other factors besides the Fed will impact the markets in 2022.

Consider for example, that the cryptocurrency currency markets have provided more liquidity to the financial markets during the last 12 months than the Federal Reserve.

Strange, but true; the cryptocurrency markets have expanded by nearly $2 trillion during the last 12 months. Over that same timeframe, the Fed’s asset-buying programs has added about $1.5 trillion.

Obviously, these sources of liquidity are not identical in nature, nor do they funnel into identical parts of the economy or financial markets. But they are both just as influential on the collective behavior of investors and consumers.

Bottom line; today’s Fed decision is probably close to a non-event. As a stock market investor, I’d be much more concerned about any serious and protracted downturn in the crypto markets.

We’ve been covering the crypto sector frequently in the Digest. We’ll continue that coverage over the coming days.

I’ll note that the entire crypto sector is rallying in the wake of today’s Fed announcement.

***Meanwhile, the other big piece of news today was the November Retail Sales Report

Let’s return to Louis for the recap.

This morning, he sent out a Platinum Growth Club Flash Alert updating subscribers on the report:

The Retail Sales Report was, for lack of a better word, a disaster.

It was only up three-tenths of a percent in November. Comps were expecting eight-tenths of a percent. Electronic and appliance store sales declined 4.6% in November. The gas station sales rose 1.7%.

Excluding gas station sales, retail sales only rose one-tenth of a percent in November. So, essentially, the higher prices at the pump are basically sucking up all the money in consumers’ pockets. And they’re not spending.

Louis dug into additional details of the report before focusing on the takeaway:

Very, very poor retail sales report.

So, that means we’re going to have downward GDP revisions. We’re not going to be growing at 8% in the fourth quarter. We’re going to be growing at probably 4% or less.

It’s not the report we wanted. We’ll be watching this closely as we move into 2022 since consumer spending makes up about 70% of the U.S. GDP.

Despite this bad report, all-in-all it’s been a positive day for the market in light of how bad things could have been if Powell and company had disappointed Wall Street.

With a huge overhang of uncertainty now out of the way, let’s look for markets to end the year on a rally.

Have a good evening,

Jeff Remsburg