“We were wrong.” Those are difficult words to say, even if you are the Federal Reserve.
On December 15, investors were waiting anxiously for the end of the Federal Reserve’s two-day Federal Open Market Committee meetings and especially for Fed Chairman Powell’s press conference afterward. The markets were on the lookout for significant monetary policy changes, and they weren’t disappointed.
The Federal Reserve did a great job stabilizing the market in the early days of the pandemic, but they seemly overcorrected. They helped the economy rebound from the pandemic but didn’t slow their actions fast enough and helped create record inflation that is hurting all Americans.
Powell didn’t come out and say the Fed had been wrong or that there is massive inflation going on, but he did say “I would say, asset valuations … are somewhat elevated,” according to CNBC. That is about as close to an admission of wrong as we will ever get from the Federal Reserve.
The market was betting the Fed would slow down its bond-buying quicker than they had planned and announce interest rate hikes for 2022 and they did. The Fed announced that it would decrease its bond purchases so it could end the program in March 2022, instead of June 2022 and that they expect three rate hikes in 2022, instead of one rate hike which they had previously projected.
The major indexes have responded positively to his speech. What’s most important to the markets, is how fast and how high the interest rate increases turn out to be. If they take a slow careful pace with rate hikes it will probably give the economy time to adjust but a fast pace could scare the markets.
Powell know these monetary policy changes affect the markets and will try to maintain stability. He said, “We understand that our actions affect communities, families, and businesses across the country. We, at the Fed, will do everything we can to complete the recovery in employment and achieve our price stability goal,” according to Marketwatch.
I agree with him, but time will tell how much stability they are able to keep. The markets will over the long haul will be the final judge. Inflation, like floodwaters, is hard to contain once it gets going.
All I want for Christmas is a market that is influenced by profits and losses of companies we are invested in and not by government bodies. I will leave cookies and milk for the big guy in hope, but I don’t think Santa can get that big of present down my chimney.
Have a blessed week!
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