Thursday, 21 October 2021 03:05 GMT

Fed Reassures on Inflation and Tapering


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Federal Reserve Interest Rate Decision 

The Fed left interest rates unchanged. It would have been a very major surprise if they had made a change. The rate has remained unchanged for a long time. It is anticipated that the next rate change will be a hike rather than a cut, but this is widely seen as unlikely to happen before some time in 2022.

Federal Reserve QE Decision 

Ever since the 2008 financial crisis, the US Federal Reserve and other central banks have effectively been printing money and using it to buy stocks. Before 2008 this policy would have seemed incredible, now it is hard to imagine the absence of such a policy. In 2008 this was seen as emergency support for a cratering financial sector. Today, analysts wonder how markets would cope without it, which arguably seems excessive when you look at the extended bull market runs many major stock markets have seen in recent years.

In recent months, the Fed has taken stock of this and began to signal that it would soon look to begin“tapering”, meaning slowly turning off the free money tap that is artificially boosting stocks. However, the Fed is now saying that the required progress to begin tapering is“some way off” from the full employment and price stability apparently needed to safely begin this process, and that ideally rates would be hiked before tapering would begin.

Federal Reserve on Inflation 

Jerome Powell, the Fed Chair, repeated his assertion that the relatively high inflation now being recorded in the U.S. economy is a transitory phenomenon that will be over within months. Analysts are increasingly buying this point of view which means that fears of inflation no longer seem to be causing market jitters.

US Advance GDP 

The quarterly annualized rate of change in advance US GDP was released on Thursday, which suggest that the US economy is growing more slowly than expected at 6.5% compared to the consensus forecast of 8.5%. Despite this seemingly gloomy undershoot, the benchmark US stock market index the S & P 500 traded at a fresh all-time high price just a few hours later.

What Does This Mean for Traders? 

To be frank, the fundamental data seem to be having little impact upon the dominant trends, whether short or long term. However, sometimes major data releases can act as a catalyst for a price move that was going to happen anyway, and this seems to be what markets are seeing now.

At the time of writing, we have both short and long-term bullish trends in the US stock market. In the US Dollar, we clearly have a short-term bearish trend, while the long-term trend still qualifies as bullish.

As these short-term trends look at least a little persistent and as they follow a major policy release, there are reasons to expect that the US Dollar will continue to sell off over the rest of this week at least, and that the S & P 500 Index will likewise continue to rise into new record high prices.

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