Timely and Relevant News: Highlights From The Federal Reserve Meeting

The Federal Reserve (Fed) recently ended its two-day Federal Open Market Committee (FOMC) meeting and as expected - there were some notable shifts to monetary policy.

Fed Chairman Jerome Powell confirmed that an accelerated plan to reduce its asset purchases was now warranted and the Committee is now expected to end its asset purchases completely by March of next year.

The Committee believes three interest rate hikes are warranted in 2022. Three months ago, the Committee was evenly split between rate hikes starting in 2022 and 2023.

What is most important for markets is how high and how fast the actual interest rate hiking campaign takes place. A slow deliberate pace of rate hikes will likely lead to a better outcome for the economy, and thus markets, than an overly aggressive one.

Powell has noted in the past that the Fed would likely not raise rates while still providing accommodation through its asset purchase plans. By ending the purchase programs quicker, this gives the Fed the “optionality” to increase interest rates sooner.

“This was a bit more hawkish shift than expected,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Quicker tapering was expected but three rate hikes projected next year is slightly more than what was expected. That said, the Fed’s job, especially from this point forward, is to prove that it can manage the removal of monetary accommodation without slowing the economic recovery.”

The Fed meets four times a year to update its economic projections for the next several years, as well as its longer-term forecasts. The Fed is predicting a 4.0% GDP growth in 2022 (up from 3.8% in September) and higher inflation expectations for 2022. The Committee sees inflation scaling back to its longer-term trend in 2023.

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This Research material was prepared by LPL Financial, LLC.