The looming Federal Reserve decision to cut asset purchases has been an obsession on Wall Street for months. Now it’s almost here, but it probably doesn’t matter for the S&P 500 and the broader stock market reaction to this week’s Fed meeting.
After the soft August jobs report, with a payroll increase of $ 235,000 about half a million below forecasts, economists changed their expectations of a reduction announcement until the November 2-3 meeting. The continued impact of the delta variant and the expiration of emergency unemployment benefits are weighing against a reduction announcement with the 2pm policy statement.
The key for Wall Street, and the likely reason for a modest relief rally in the S&P 500, will be the Fed’s new batch of quarterly economic projections. One projection matters above all: Will the Fed signal a rate hike in 2022 or not?
Federal Reserve Economic Projections
The June dot plot, which tracks the individual outlook of each member of the Fed’s policy committee, had 7 out of 18 pointing to a quarter-point rate hike in 2022. That means some more centrists would have to turn. aggressive to change the balance to a 2022 setting.
“Will points show further increases? We think so, but not in 2022,” wrote Jefferies chief economist Aneta Markowska. “Higher inflation forecasts should not influence the timing of takeoff,” the first hike of the cycle.
The Fed’s favored measure of inflation, the Personal Consumption Spending Price Index, was already on track to exceed its 2% target. Jefferies expects the new Fed projections to raise the PCE inflation outlook for 2022 from 2.1% to 2.2%.
The Federal Reserve’s average inflation targeting framework adopted last year ruled out proactive rate hikes to stem an excessive rise in inflation. “Therefore, anyone switching from no increase to an increase in 2022 would have to update their labor market forecast, for which we do not see any justification at this time,” Markowska wrote.
However, this could become a bigger problem for the December meeting, as we will have three more jobs reports by then.
In the meantime, policymakers could include an additional rate hike by 2023. June projections saw 11 of the 18 policymakers score at least two rate hikes in 2023, while 8 posted at least three hikes. Additionally, the projections are expected to include the 2024 rate outlook for the first time, likely showing multiple hikes.
Stakes at Fed Meeting Increase as S&P 500 Slides
The S&P 500 got off to a rocky start to a Fed-centric week amid fears that insolvency at China’s Evergrande real estate group could force a harsh restructuring of the country’s real estate markets. Economists see a potential cut in Chinese GDP growth that is large enough to have a global impact. Commodity prices could be the hardest hit.
With copper prices sliding, Freeport-McMoRan (FCX) was among the biggest losers on the S&P 500, falling 5.6% to the lowest level in nearly six months. Construction equipment giant Caterpillar (CAT), a component of Dow Jones. fell 4.5% to a seven-month low.
The overall S&P 500 fell 1.7% in stock market action Monday, closing low after sinking to late-July levels. The S&P 500 already closed below its 50-day line on Friday.
The Nasdaq took a somewhat bigger hit, falling 2.2% to undermine its 50-day line, but after falling more than 3% intraday. The Dow Jones lost 1.8%, hitting a three-month low and heading toward its 200-day line.
The recent sale could produce a measure of relief if the Federal Reserve delays the reduction and the projections continue without showing rate hikes until 2023. However, disappointment on one or both fronts could further dampen sentiment.
The 10-year Treasury yield fell 6 basis points to 1.31% on Monday as concerns about global growth weighed.
Be sure to read IBD’s The Big Picture column after the close every day for the latest market trend analysis to ensure growth investors get the green light.
So far, the Federal Reserve has handled the risk of a 2013-style tantrum with impressive dexterity. Despite Fed Chairman Jerome Powell revealing his support for a tapering start to 2021 in his Aug. 27 press conference, the S&P 500 ended that session at a record at the time.
The Fed is buying $ 120 billion in assets per month. That includes $ 80 billion in Treasuries and $ 40 billion in government-backed mortgage securities. The Fed has signaled that it will gradually reduce those purchases and eventually end them sometime in 2022. We may get more details on the plan in the minutes of the Fed meeting to be released in October. 13, if not at Powell’s press conference at 2:30 pm on Wednesday.
Follow Jed Graham on Twitter @IBD_JGraham for the coverage of economic policy and financial markets.
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