The Daily Dive #116 - FOMC Meeting Recap

Fed Accelerates Taper 

Today, the Federal Reserve Board announced doubling the pace of their asset tapering to $30 billion a month, which was slightly more hawkish than consensus expectations. Rather than end all asset purchasing today, Jerome Powell highlighted that a calculated, methodical approach to winding down asset purchasing is a more stable approach for markets. The current plan is for asset purchases to end by March 2021 with the market expecting a high probability of three interest rate hikes in 2022, up to 100 basis points. 

December 2022 Eurodollar futures, which is a market for pricing the offshore dollar interest rate, are currently trading at 98.945. The Eurodollar futures market is the market’s expectation for the federal funds rate (i.e. a price of 100 would imply an expectation of the federal funds rate being 0.00%).

The doubling of the taper pace also comes with increased, notable inflation projections from the September estimates for 2021 and 2022. The Federal Reserve Board is still committed to a 2% inflation target long-term. The below table shows a 2.7% Core PCE inflation rate for 2022 up from the previous 2.3% projection. 

Powell noted that the recent inflation is “not the inflation they were looking for” citing monetary and fiscal policy moves, into a recovering economy, as key impacts. He also highlighted the rising risk of persistent, entrenched inflation which is a key reason for speeding up the taper. This is a clear narrative shift from the previous months’ “inflation is transitory” position. 

Source: Federal Reserve Board Economic Release

On cryptocurrencies, Powell commented that he doesn’t see them as a major financial stability concern, but that the leverage in the system is worth watching. He noted they are risky and speculative while highlighting the potential benefits of stablecoins if they were to be regulated. 

All that said, Powell had a tremendous amount of dovish commentary in his Q&A despite the more hawkish actions, indicating the Federal Reserve is ready to pivot their policy as necessary with more accommodative monetary policy. This was a favorable short-term signal to markets. We’ll see real monetary tightening policy start to play out in markets if rate hikes happen in March. 

Following the announcements of the Fed’s expected taper policy, both bitcoin and equities rallied in tandem, indicating the meeting was a sell the rumor and buy the news type of event.