The Federal Reserve began to gradually scale back asset purchases on Monday, in keeping with its Nov. 3 taper announcement. But after last week’s blowout inflation data, Wall Street already thinks that policymakers will have to pick up the pace. In Monday’s stock market action, the Nasdaq composite was pressured as the 10-year Treasury yield rose.
The Fed’s taper plan would see the $120 billion in monthly asset purchases shrink by $15 billion per month. That would bring purchases to an end by mid-June. But the Federal Reserve only committed to that pace of withdrawal for this month and next. That left an option of shifting gears to speed up or slow down its exit from crisis-driven asset purchases.
Since Nov 3, both inflation and employment data have come in hotter than expected. “The market thinks the Fed needs to move faster,” Barry Knapp, managing partner of Ironsides Macroeconomics, said on a podcast recorded on Sunday.
Fed Taper Done By March?
Aneta Markowska, chief economist at Jefferies, wrote Friday that she expects the Fed to speed up “to make room” for an early consideration of rate hikes.
“With inflation pressures mounting, we expect the Fed to respond by accelerating the taper at the December meeting, and finishing in March,” three months early, Markowska wrote. She now expects two quarter-point rate hikes in 2022.
A faster wind-down of purchases shouldn’t make a dramatic difference. If the Fed continues on its current trajectory, ending in June, it would buy a total of $420 billion in additional assets. If Markowska is right and Federal Reserve buys end in March, it will likely buy $285 billion more.
Wall Street may prefer a faster phaseout of asset purchases, if it helps convince market participants that the Fed is standing guard against inflation, as needed.
Federal Reserve Seen As Too Patient
With the hindsight of last week’s 30-year-high 6.2% CPI inflation rate, Fed chief Jerome Powell’s Nov. 3 news conference probably didn’t set the right tone. Powell preached patience. He said that inflation will stay elevated well into 2022, but that rate hikes wouldn’t be a good way to address supply chain constraints contributing to price pressures.
Yet the latest CPI report showed inflation broadening out to rent and medical services. Those categories aren’t as clearly impacted by pandemic constraints.
At the moment, Wall Street seems to be calling for the Fed to be a little more proactive and a little less reactive. CME Group’s FedWatch page indicates that markets are pricing in higher than 50% odds of three quarter-point rate hikes next year.
Nasdaq Underperforms S&P 500
The Nasdaq composite lost less than 0.1%. The S&P 500 was just below break-even and the Dow Jones Industrial Average edged lower.
The 10-year Treasury yield rose 5 basis points to 1.63% on Monday. That’s not too far off the post-pandemic high of 1.77% in March.
A higher 10-year yield is a headwind for growth stocks, whose valuations reflect longer-term earnings prospects discounted to the present by the 10-year Treasury yield.
Tesla (TSLA) sank 1.9% on Monday, briefly undercutting 1,000 after TSLA stock tumbled 15% last week, snapping an 11-week win streak. CEO Elon Musk sold several million shares last week, with markets betting that he’ll continue selling Tesla stock this week.
After a strong start to 2021, the Nasdaq lagged the S&P during the spring as the 10-year yield spiked amid passage of the $1.9-trillion stimulus.
For the year, the Nasdaq’s 23.1% gain through Friday only slightly lags the S&P 500’s 24.7% advance. The Dow Jones has climbed 18%.
For now, corporate profits are booming, because companies have been able to pass along the cost of higher wages and commodities prices. However, the risk is that sustained inflation will become self-reinforcing, as workers push for higher wages to keep ahead of the cost of living, and companies respond with further price hikes.
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