The global markets are proving to be resilient as both the U.S. Federal Reserve (Federal Open Market Committee) and other central banks around the world prepare for a slowdown in monetary easing. On Wednesday, the U.S. central bank’s Federal Open Market Committee (FOMC) said it plans to taper quantitative easing (large monthly asset purchases) and end the program by March 2022. The FOMC members also decided that interest rates would remain at zero, but they expect to increase them by at least three times next year.
Federal Reserve Announces Rate Increases and Asset Purchase Tapering Plans for 2022
The U.S. Federal Reserve has initiated an unprecedented monetary easing program since the inception of Covid-19. The move has led to a surge in inflation and analysts and economists worldwide have criticized the Fed’s decisions in recent times. Two-day FOMC meeting concluded Wednesday. The central bank announced its plans to reduce its monthly bond purchasing program to $30 million per month, by January. This month the Fed will leverage $90 billion in quantitative easing (QE) purchases as opposed to last month’s $120 billion.
The FOMC members revealed that in addition to QE tapering, they also stated that there are three more rate increases planned by the central bank next year. Three rate hikes are expected in 2022. Two more will be made in 2023. There will also be two additional rate rises in 2023. In 2024, there will be two rate increases. However, the Fed didn’t blame rising inflation in America on QE, but rather noted that it was due to issues with supply-demand balance.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the FOMC said on Wednesday. In addition, FOMC statements stated Covid-19 (and new variants of coronavirus) have greatly affected the U.S. Economy.
‘Buy Rumors, Sell Facts’: Global Markets and Bitcoin Rise Following the FOMC Meeting
Despite the taper statements and disclosing that there will likely be three rate hikes next year, the Fed’s comments saw a market reaction opposite to what was predicted before the taper announcement. After the FOMC meeting ended, the Dow Jones, NYSE and Nasdaq all posted gains. Speaking with Bitcoin.com News, Alex Kuptsikevich, the Fxpro senior market analyst, said the Fed “held the most hawkish edge of market expectations” on Wednesday.
“The FOMC announced that it would double the pace of tapering,” Kuptsikevich said. “The committee’s updated forecasts suggest three key rate hikes in 2022, although only six months ago, it expected none. We also heard that the balance of the Fed’s targets allows a rate hike to begin before achieving full employment due to higher inflation.”
“The Fed chairman also called financial asset valuations ‘elevated,’” the market analyst continued. “This is a clear signal of a willingness to hurt the markets, as he did in 2018. During the press conference, Powell noted that FOMC did not yet have a consensus on the timing of the Fed’s balance sheet cut. In the previous stimulus wind-down cycle, this was not an actual issue long after the start of the rate hike — The dollar index rallied within the first minutes after the FOMC, touching the highs from July 2020, but then it turned back down, losing 0.8% from the peak at the time of writing.”
Kuptsikevich also added:
The feeling is that the markets have prepared for a risk-on, expecting softness from the Fed, and have not backed down despite the Fed’s rhetoric. Some commentators believe we saw a classical ‘buy rumours, sell facts’ reaction. However, the rise in ‘growth’ stocks speaks more about the market mood to end a strong year on a cheerful note. At the same time on the dollar, a wave of profit-taking growth in the last six months seems to have started, although the Fed’s stance is much more hawkish compared to other central banks from the DXY basket.
Even bitcoin (BTC) defied expectations on Wednesday, as the price kicked up a notch after the FOMC’s hawkish plans were announced. BTC could be bought for $46,590 a unit just before the FOMC meeting. However, after the FOMC meeting, BTC prices reached a high of $49,000.
Bank of England increases benchmark rate; European Central Bank holds rates down, US unemployment claims still above pre-pandemic level
In addition to the FOMC meeting the Bank of England raised its benchmark interest rate from 0.1% by raising it to 0.25%. This was the first time that other central banks have made this move, and the European Central Bank did the same as the Federal Reserve but kept the benchmark rate low for the moment.
European Central Bank stated that they will not increase borrowing rates until inflation stabilizes. The Labor Department also reported a slight increase in U.S. weekly unemployment claims last week. The Labor Department’s report shows jobless claims are still well above pre-pandemic levels.
What do you think about the Federal Reserve’s taper process and discussions about raising the benchmark rate three times in 2022? Do you have any thoughts about the Bank of England raising the benchmark rate, for the first time in 2022 since the outbreak of the Covid-19 epidemic? Please comment below on your views.
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