Market Monitor: December Mid-Month Update
Headlines and Highlights
- Fed accelerates wind-down of bond purchases, eyes 2022 rate hikes: In a move expected by markets, the Federal Reserve signaled that it will soon end the emergency measures taken to support the economy during the COVID-19 pandemic and focus more on fighting inflation. The Fed announced it will wrap up its stimulative bond-buying program in March, three months sooner than previously planned. A survey of top Fed decision-makers suggested the central bank is likely to raise its benchmark interest rate three times in 2022, although that could change based on how the economy fares next year.
- Inflation hits highest level in 39 years, forcing Fed’s hand: U.S. consumer prices rose 6.8% in November compared to a year earlier, the highest overall rate since 1982, as supply-chain slowdowns tied to the pandemic continued to cause inflationary pressures. The persistence of elevated prices coupled with growing wage inflation as employers try to attract people back to the workplace prompted the Fed’s decision to remove stimulus sooner.
- Congress raises debt ceiling by $2.5 trillion: President Joe Biden signed legislation passed by Congress to raise the government borrowing limit to $31.4 trillion, averting default after a 4½- month partisan battle. The $2.5 trillion increase is expected to cover the government’s needs into 2023, avoiding another political showdown on the issue until after midterm elections.
Chart of Interest
Ready for Takeoff: The policy-setting Federal Open Market Committee foresees making three interest rate increases in 2022 after two years of keeping the rate at zero to aid the economy.
Sources: Federal Reserve, Altair Advisers
- The Fed’s announcement confirmed that it is pivoting away from the ultra-easy monetary policy employed since the early days of the pandemic and leaves open the possibility of a first interest-rate increase as soon as March. Its policy adjustment reflects not just higher inflation but also a U.S. economy that is growing vigorously despite the persistence of COVID-19. The Fed raised its 2022 GDP projection to 4.0%, up from its 3.8% estimate in September.
- Consumer demand has stayed strong through a surge in Delta cases, the emergence of Omicron and the rise in prices, with retail sales increasing for four straight months. A forecast of continued gains in December bodes well for the economy’s stability in the face of other challenges. Consumers are financially strong – household net worth has risen for the past six quarters to reach an all-time high – which helps to underpin the economy.
- Markets’ initial reaction to the Fed’s news was positive following an earlier bout of December volatility in smaller-company stocks and growth stocks. Historically, the first increase in a rate-hike cycle has not been harmful to the stock market. During the past eight rate-hiking cycles, the S&P 500 has risen an average 6.6% in the first six months after an initial increase and has rallied in the months leading up to the hike.
- Inflation is running high not only in the United States but also elsewhere, hitting its highest level (4.9%) since 1997 in the 19 countries that use the euro. While the Fed acknowledges that inflation is currently higher than originally anticipated, it still projects the core PCE price index – its preferred gauge – to drop from 4.4% at the end of this year to 2.7% at the end of 2022 as supply issues gradually ease.
- The job market continues to progress back toward normal. The economy remains about 4 million jobs short of the pre-pandemic level, and some 4.2 million Americans quit their jobs in October. But many of those leaving jobs are switching to new employers. The unemployment rate fell to 4.2% – up from 3% before the pandemic but down from 6.7% a year ago.
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