The market reaction to the Federal Reserve’s announcement that they’ll be tapering asset purchases has been incredible, and indexes are hitting record highs.
Oftentimes, when it comes to the financial world, it’s a “good news/bad news” scenario whenever a big development happens…doubly so when it involves the Federal Reserve.
Very seldom does the Fed announcing that they’ll be “pulling back” on one of their policies lead to a positive reaction from the markets as a whole.
But this is 2021…and that means that things have changed.
2021 has brought us some of the weirdest financial reactions our economy has ever seen.
Can you remember a time when inflation was running rampant and yet the markets were doing the same as ever?
They’ve often worked in inverse to each other. If inflation is up, the markets are down, and vice versa.
But right now, even with inflation starting to soar, the markets are heading in the same direction—which is very peculiar, seeing as the typical reaction to inflation from the Fed has always been to raise the interest rates.
Big News Sends Stocks Soaring
However, Fed Chairman Jerome Powell and company have decided to let the interest rates stay where they are, and instead have announced that they’ll be tapering their asset purchases going forward.
Now, traditionally, you’d have expected an announcement like this to negatively affect the markets, as this is seen as the first step in the process of rate increases to stem the rise of inflation.
First, the fed tapers its asset-buying, then it stops buying them altogether. Then it starts selling assets, and then it starts raising the rates. It’s a cycle we’ve seen repeated over and over again since Nixon took us off the Gold Standard.
However, as I said, this is 2021, and what we THOUGHT we knew about how the market would react to the Fed’s actions to battle inflation has been flipped on its head.
And instead of the markets taking a dip on the news, they’ve come back with record highs.
The Dow Jones Industrial rose 104 points (0.29%), and the S&P 500 and the Nasdaq rose 0.65% and 1.04%, respectively, pushing all three of the major averages into the realm of record highs.
All this came on the tail of the Federal Reserve’s conclusion of a two-day meeting on Wednesday, in which it announced it would begin reducing the pace of its Treasury purchases by $10 million and mortgage-backed securities by $5 billion.
Now, market experts are predicting that the US won’t see its first rate hike until July of 2022.
Are These Records Something To Celebrate?
The Federal Open Market Committee said in a statement, “The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
Basically, we’re being forewarned that more changes are coming…but some experts are saying that this isn’t enough.
Sure, the markets reacted favorably to this news, but it’s because a lot of people were expecting MUCH worse. The rate of inflation seems to be outpacing our growth.
To some, it seems like the Fed is letting a SIGNIFICANT inflation problem build up behind a dam and without taking any real action, we’ll see that dam burst towards the end of 2023 or the beginning of 2024.
If that happens, we might be looking at several years of fairly sizeable inflation if the Fed doesn’t take some significant action soon.
Only time will tell…
All we can do right now is cross our fingers and hope for the best.
There’s a LOT that can happen between now and then…
So, let’s take advantage of the climate and do our best to make some cash!
“There is no risk-free path for monetary policy.” – Jerome Powell