Wall Street was laser-focused on yesterday’s Federal Open Market Committee (FOMC) statement, as investors hoped they’d finally receive clarity on what the Fed’s next moves would be to rein in inflation. Well, we got our answer, and it was what I’d anticipated: The central bank will quicken its pace of reducing economic stimulus in the form of monthly bond purchases and begin raising interest rates in the New Year.
The somewhat hawkish moves, approved unanimously, come as economic indicators and employment have continued to strengthen, while “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 in a statement.
Now, I anticipated a relief rally following the Fed statement, and that’s just what we got yesterday and today. The broader market started the day Wednesday in negative territory but started climbing after the Fed released its statement and closed higher, with the Dow climbing 1.1%, the S&P 500 rising 1.6% and the NASDAQ gaining 2.2%.
At its much-anticipated meeting Wednesday, the FOMC said the Federal Reserve will start buying $60 billion of bonds per month starting in January, down from $120 billion per month before November and the $90 billion per month in December. Fed officials said they’d trim bond purchases by $30 billion per month starting in January and end the bond purchasing program by March — unless the economic outlook changes — ahead of increasing the short-term benchmark interest rate to help tame inflation.
For the time being, the FOMC said it would maintain its target range for the federal funds rate at 0% to 0.25% as the committee “seeks to achieve maximum unemployment and inflation at the rate of 2 percent over the longer run.”
Fed officials’ projections also show the Fed anticipates implementing as many as three rate hikes in 2022, two in 2023 and two more in 2024. As recently as September, about half of the Fed officials believed rate hikes weren’t needed until 2023, while most did Wednesday.
“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Chairman Jerome Powell said after the FOMC meeting.
The FOMC also increased its inflation outlook for the year for all items to 5.3%, up from 4.2% in September. Their forecast for inflation for items excluding food and energy prices rose to 4.4% from 3.7% in September.
Looking forward to 2022, the FOMC expects headline inflation to reach 2.6%, while core inflation should rise to 2.7%, both of which were higher than in September.
Unemployment for 2021 fell to 4.3% from 4.8% in September, with the committee saying, “Job gains have been solid in recent months, and the unemployment rate has declined substantially.”
The hawkish moves were expected in light of the latest retail sales report, which was for, lack of a better word, a disaster.
Retail sales rose 0.3% from the prior month, well under the 0.8% economists were forecasting. Sales at electronics stores were down 4.6% in November from October, while spending at non-store retailers like online sellers was flat. Meanwhile, sales at gas stations were up 1.7% last month and are 52% higher from a year ago.
As a result, I expected the Fed would revise its GDP forecast downward and that’s just what happened. The FOMC now expects GDP will increase 5.5% in 2021, compared to their 5.9% projection in September. The committee did increase its GDP prediction for 2022 to 4%, up from 3.8% in September.
Across the pond, the Bank of England also said it would increase its key interest rate by 15 basis points to 0.25%.
But as inflation hit a record high in the euro zone in November of 4.9%, the European Central Bank decided to take a more dovish stance than regulators in England or the U.S. It will keep its Pandemic Emergency Purchase Programme in effect through March 2022, with the potential to cost about $2.2 trillion when all is said and done. The European Union’s Asset Purchase Programme will also continue at $20 billion euros per month. In total, the European Central Bank bond purchases will decelerate to 40 billion euro per month in April 2022 from about 80 billion euro per month now. However, the bank said it would maintain its key interest rate at negative 0.5% until it ends its bond purchasing.
I should add that China’s economy is also slowing down. Retail sales in November climbed 3.9% from a year prior, missing expectations for 4.6% growth. Germany’s economy is also decelerating. The Ifo Institute for Economic Research expects Europe’s largest economy will contract 0.5% in the fourth quarter and is on the brink of recession.
Interestingly, the institutional and international buying pressure for U.S. Treasuries is relentless. In fact, despite inflation recently hitting a 39-year high, yields on the 10-year remain remarkably low at 1.44%.
And that’s just because, compared to the rest of the world, the U.S. is an oasis where foreign capital continues to flow. Last Wednesday, for example, foreign capital flows accounted for 69% of the 10-year Treasury sales.
Given this, I expect a market rally in late December during the seasonally strong time of year while folks enjoy the holidays together with family and friends.
I also anticipate the market gapping higher in January as new pension funding and new money floods into the market and gravitates to fundamentally superior stocks.
Now, as many of the world’s central banks move to rein in inflation, many folks are wondering what 2022 will bring to the markets.
How will inflation impact stocks? Is a market correction imminent? How will the pandemic affect the markets?
I recently sat down with two of my InvestorPlace colleagues, Senior Growth Investment Analyst Luke Lango and stock-picking star Eric Fry, to answer these questions and more about the coming year.
During the event, we revealed four free stock picks for 2022, just for those who attended the summit. You can catch the replay and get the free picks by clicking here.
Most important of all, we assembled a portfolio of the eight best stocks for 2022. And today, we’re adding a brand-new recommendation to our 2022 lineup! The company is a leader in the semiconductor industry that has beaten Wall Street’s top- and bottom-line estimates for the past three quarters. Over the past 60 days, analysts have increased their earnings predictions for the company by 14%.
So click here to find out what Luke, Eric, and I see as the biggest and best profit opportunities for 2022.
P.S. 99% of the population is clueless about the major events about to rock the markets in early 2022. This is the #1 thing Luke, Eric and I believe you MUST do before January 1, 2022. Get the details here.
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