The Federal Reserve announced on Wednesday that it will begin winding down its massive stimulus plan later this month by cutting back its bond purchases by $15 billion per month. At its current purchase rate of $120 billion per month, this policy will taper purchases down so that the stimulus program ends by mid-2022. The allocated cuts will come in the form of a $10 billion-per-month reduction in Treasuries and $5 billion less in mortgage-backed securities per month. The decision was in line with analyst expectations and caused the markets to react strongly higher, with government bond yields heading modestly higher and stock markets ending the New York trading session at record highs.
The Federal Open Market Committee (FOMC) kept interest rates stable and is expected to release a new dot plot and forecasts in December which will outline the expected upcoming rate hikes. The first interest rate hike is widely forecast to come in September 2022 at the earliest. However, some policymakers have publicly called for the Fed to act faster. Once such policymaker is former Fed governor Robert Heller, who criticized the Fed for being "behind the curve".
The Fed is facing a continued challenge as high consumer demand, supply chain issues, and current stimulus efforts are driving prices higher and contributing to rising inflation. Extremely high fuel costs further contribute to the problem and have not only caused price increases on consumer goods but have made it difficult for many Americans to pay their utility bills.
According to US government figures released in October, annual inflation is at rates not seen in the past 30 years, with prices rising 4.4 percent in the year ending in September, the fastest rate the country has seen since 1991.
“We understand the difficulties that high inflation poses for individuals and families, particularly those with limited means for higher prices for essentials such as food and transportation,” Powell said.
However, Federal Reserve Chair Jerome Powell and Janet Yellen, the Treasury secretary (and former Fed chair), have continued to maintain that the steep rise in prices will abate as the economy recovers from the pandemic. Powell also commented that if inflation does not decline as he expects, the Fed will move to raise rates.
On Friday, the non-farm payroll (NFP) report will provide additional insights into the state of the US economy. In September, only 194,000 new jobs were added, significantly lower than the 500,000 jobs analysts had predicted. The ADP report released on Wednesday showed that private payrolls increased by 571,000 in October. The gains were seen mostly in the leisure and hospitality industries which saw 185,000 workers return to the workforce after taking leave during the pandemic. The Labor Department's NFP report will be released on Friday at 8:30 a.m. EST.
Wall Street's three major benchmarks, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ all rose following the Fed's announcement and closed the session at new highs. Asian markets are trading broadly higher during Thursday's Asian session, with the Shanghai Composite and the Shenzhen composite up 0.75 percent and 1.18 percent, snapping multi-day losing streaks during which Chinese markets lagged behind their Asian counterparts. Japan's Nikkei was up 0.93 percent as of 6:46 a.m. GMT, while South Korea's Kospi gained 0.28 percent and Australia's ASX 200 gained 0.48 percent.
The currency markets were fairly quiet after the FOMC statement release, with the USD remaining bullish but lacking volatility. The dollar gained 0.17 percent against the yen to trade at 114.18, and the greenback was up 0.11 percent against the Canadian dollar to trade at $1.24. The British pound and the euro also slid against the dollar, sending the USD Index up to 94.07.