After the FOMC

 After the FOMC 

First things first, apologies this update is a little late, but the market moved a lot yesterday and every time I tried writing an update my numbers were out of date in no time. 

Nevertheless, I’ve put together a few thoughts on the recent FOMC meeting below: 

Key Takeaways: 

Fed forecasts show that members are evenly split on the possibility of a 2022 rate increase. 

• We had a couple of moves in the dots so the median now expects a hike in 2022. 
• For me though, this is unimportant - the committee acts on the recommendation of the chairmen and as long as Powell wants to be on hold this is likely to be the outcome. 

Moderation in Bond Purchases May Soon be Warranted: 

• This is the critical takeaway from the whole meeting. 
• The Fed now feels it is in a position whereby tapering of asset purchases may soon be ready. 
• This is what the market has been waiting for - and it is a testament to Powell that he was able to deliver the news of the taper without the market reacting aggressively to the downside. 

Changes to Projections: 

• The FOMC also updated their projections for key economic data and what stood out to me was that they still only see core PCE at 3.7%. They have been on the backfoot with these numbers a long time. 
• We saw the BOE announce that it expects +4% inflation this year so this is likely to be similar around the world. 

Reverse Repo Limit Doubled: 

• Around two years ago I wrote a piece explaining repo - feel free to use the search functionality to find it or message me and I can send to you. 
• But basically, this is reverse repo - in other words for draining liquidity from the system when banks have too many reserves. 
• The doubling of this shows the Fed anticipates these conditions lingering - each institution can now tap the facility to the tune of USD160bn!

Powell says substantial progress on inflation has been achieved: 

• Fairly obvious - inflation way above target. 

Powell says the employment “substantial further progress” has been “all but met”

• This was pretty key for me as going into the meeting I anticipated Powell being the dove among the hawks. But this appears to not be the case with Powell basically saying he is happy to taper now. 
• He wanted to see a “decent” jobs report for September numbers but doesn’t need to see a “blowout” report. 
• This puts Powell in a bit more of a hawkish position than I think many expected - this may explain the significant leap higher in the 10y yesterday to 1.4%+ 

On the whole, I thought this meeting was a major success for Powell. He didn’t upset the equity markets, delivered the timing and timeline of the taper and addressed some other key issues like fed credibility in the wake of the trading scandal. 

I’d be pretty comfortable holding equities until the November meeting now. Even further inflation numbers shouldn’t spook the market too much as it seems the Fed has moved away from “transitory” to a more cautious approach to inflation.