As we mentioned in our line-up of events in the stock market and broad economy this week, the Federal Reserve Bank’s September policy meeting was held on Tuesday and concluded yesterday, Wednesday, September 22, 2021.
After the meeting, Federal Reserve Chairman Jerome Powell held a press conference to communicate the outcomes of the meeting to a highly expectant group of economists, company top executives, analysts, and investors alike.
In the press conference, Powell said that the central bank will most likely start pulling back its extraordinary crisis-era monetary stimulus in a phased manner starting as soon as November and running until mid-year 2022. It should be noted that the Federal Reserve Bank introduced an asset purchase program worth $120 billion each month in what is commonly known as quantitative easing. Under this program, the Federal Reserve buys mortgage-backed securities (MBS) and Treasuries in a move to pump both capital and liquidity into the market to shield the economy from the effects of the coronavirus pandemic and keep it afloat. This program was introduced in June 2020 at the height of the COVID-19 pandemic, but the Central Bank had earlier introduced other measures like keeping interest rates to near-zero levels in March 2020.
During the press conference yesterday, Powell told reporters that a gradual tapering process “is likely to be appropriate” as long as the economic recovery remains on track.
Before Powell’s presser, the Federal Open Market Committee had communicated earlier in the day that the U.S. economic recovery was progressing well enough to allow the Federal Reserve Bank to soon pull back its asset purchases, saying that if the economy keeps up with its recovery pace as broadly expected by economists, the policy-setting Committee will warranty a moderation in the pace of asset purchases. With these pronouncements, it is pretty clear that the Fed could be ready to make a taper announcement as soon as its next meeting in early November.
Since the talk of taper plans hit Wall Street a few months ago, the Federal Reserve has constantly reiterated that it would keep its foot on the brake pedal of these pro-economy recovery measures until the economy had made substantial progress towards the Central Bank’s goal of maximum employment, stable commodity prices, and inflation among other recovery indicators.
The Fed has achieved its 2% inflation target, but the labour market recovery still has a way to go. The August jobs report released early this month showed that 235,000 jobs were created. This figure would have been impressive except for the fact that it was three ‘times lower than what Wall Street had estimated to be added in August, a total of over 700,000 jobs. Unemployment claims have been falling every other month this year, but gains are not yet at a point where the Fed wants them to be.
Yesterday, we reported that Evergrande Group (HKG: 3333) is having a big problem paying off its debtors, so much so that it announced that it would be paying them off with property due to a shortage of cash. Although it owns more than 1,300 projects in more than 280 cities across China, Evergrande currently holds the position of the most indebted property developer globally. Evergrande’s stock has been falling all year long and has dropped as low as 83% year to date.
Early this week, when news of Evergrande’s poor performance, indebtedness, risk of collapsing, and an announcement to pay off its debts with property hit the world outside China, global stocks were shaken, and this shock extended to crypto markets.
When asked if Evergrande’s woes would spill over into the U.S. economy and broad stock market, Fed Chair Powell swatted down these concerns saying, “the issue appears to be very particular to China for now”, and that “there is not a lot of direct U.S. exposure to Evergrande”.
After Powell’s press conference, stock futures were not affected by his remarks as they traded slightly higher on Wednesday evening and in extended trading sessions. Contracts on the S&P 500 gained as the index rose for the first time in five sessions. The benchmark S&P 500 kicked off the week with steep losses, and although it gained yesterday evening, it is still on track to register a weekly decline of nearly 1%. However, this should not overshadow the fact that the index has enjoyed a selling streak in September.
The Federal Reserve’s upbeat tone on the economic recovery and suggestion that the timing of the tapering process of its asset purchase program would come mainly in line with market expectations helped sustain a rally in risk assets during Wednesday’s session. Fed Chair Jerome Powell reiterated that he believed the U.S. economy had already surpassed the central bank’s goals for inflation and said a “reasonably good” September jobs report would indicate that the Fed’s employment goals to begin tapering had been satisfied as well.
James Bruderman, the Vice-Chairman of 1879 Advisors, noted that the way investors and the market reacted to Powell’s remarks about rising interest rates in the near term shows that the economy is not in a strong state.
“That doesn’t mean that longer-term interest rates are going to go up overnight, but certainly I think there is downside risk in bonds from these levels for the foreseeable future,” Bruderman said, as quoted by Yahoo Finance.
Bruderman added that equities are in a good position to continue performing well and that he sees no reason why a Gross Domestic Product (GDP) of between 2.5% and 3% can’t be achieved in the next three or four months.
Rick Rieder, the Chief Investment Officer at Investment management company BlackRock Inc. (ticker: BLK), said that although the market has been nervously waiting for the start of the tapering for months, it is unlikely to have a significant impact on the broad stock market, and it is because the central bank has done tremendously well to telegraph when it is likely to begin.
This is how stock futures were trading after the Fed decision yesterday, at 18:11hrs ET:
S&P 500 futures (ES=F): +3.25 points (+0.07%), to 4,387.25
Dow futures (YM=F): +40 points (+0.12%), to 34,169.00
Nasdaq futures (NQ=F): +16.25 points (+0.11%) to 15,179.75.