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Fed Meeting: Stock Market Reaction Hinges On These 4 Words

There’s one big question for today’s Federal Reserve meeting. Are we “still a ways off” from seeing sufficient economic progress for policymakers to begin tapering asset purchases? If chief Jerome Powell repeats that phrase in his 2:30 p.m. ET press conference, one stock market risk should be off the table until the Fed next meets on Sept. 21-22, and investors can exhale.




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If not, that would raise expectations that Fed chief Powell might telegraph a coming policy shift at the Fed’s annual Jackson Hole symposium to be held Aug. 26-28.

Federal Reserve Taper Timing

Actual tapering of the Fed’s $120-billion per month in asset purchases won’t likely begin until late this year, or early in 2022. However, the stock market and, especially, the bond market could begin to price in a forthcoming policy shift. That might prompt a move higher for the 10-year Treasury yield, which would be a headwind for growth stocks and the Nasdaq. Bank stocks, whose net interest margins benefit from a steeper yield curve, could get a lift.

A key question is what the Fed will make of the surge in Covid cases and hospitalizations, mostly among the unvaccinated. While the economic risk from an unexpected Covid wave appears limited, Fed policymakers may want to wait for evidence that job growth remains robust.

The Covid upsurge is hitting as the pandemic boost in unemployment aid will expire for 10-million sidelined workers by Labor Day. Meanwhile, the steady decline in filings for new jobless benefits has recently stalled near 400,000 per week. Those factors would seem to suggest that Fed chief Powell will reiterate his soothing “ways off” message.

On the other hand, elevated inflation readings since the Fed last met could make policymakers antsy to get started with tapering, which is the first step to tightening policy.

Stock Market Rallied After June Fed Meeting

The June 15-16 Fed meeting provided a hawkish surprise, as the Fed penciled in two rate hikes in 2023, after previously signaling no change before 2024. The Fed’s quarterly economic projections showed that 11 of 18 policy committee members saw at least two rate hikes as appropriate in 2023 vs. 6 members in March. In addition, seven of 18 policymakers indicated a view that the Fed should start hiking rates in 2022.

Yet that hawkish shift seemed to be positive for the stock market. The 10-year Treasury yield fell after the June Fed meeting, as policymakers pushed back against a sense they had totally let down their guard against inflation. That helped spark a stock market rally. The three major stock market indexes all closed at record highs on Monday before slipping on Tuesday. Still, it’s hard to tell how much investors were reacting to the Fed or to the outbreak of the Delta Covid strain.

However, investors may not react as kindly to another hawkish surprise on Wednesday. This time, if the Fed hints that tapering is near, the 10-year Treasury yield would likely move higher, not lower.

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