FOMC Announces Taper at November Rate Decision

Federal Reserve Rate Decision, November 2020

The Federal Reserve announced a start to tapering asset purchases at the November rate decision today.
This article will be updated throughout the rate decision and press conference with focus on the US Dollar, S&P 500 and Nasdaq 100.

The long-awaited rate decision is here, and the FOMC has just issued their statement to announce a start to tapering asset purchases to the tune of $15 billion per month. This puts the bank on schedule to finish tapering in H1, 2022.

As Chair Powell has said multiple times in the past, tapering and rate hikes are different matters altogether, but by finishing bond buys in the first half of 2022, the bank is on track to begin hiking rates later in the year.

The motivation to tighten policy is brought on by persistently strong inflation numbers, which haven’t turned out to be as transitory as the Fed would’ve liked after inflation spiked above 4% in April. CPI printed at 5% for May and since then, there hasn’t been a print below 5.3% and last month saw inflation tick back up to 5.4%.

The Fed’s inflation target has long been 2% but last year the bank adjusted their strategy to instead focus on average inflation targeting, giving them more operating room considering the economic dynamics around the pandemic. But that additional operating room appears to have not helped matters regarding inflation and the question now is how quickly the bank may be looking to normalize rates should inflation not begin to pull back in the near-term.

US CPI Since September, 2020

Chart prepared by James Stanley

USD Initial Reaction

The initial reaction in USD has been a quick bearish shot, suggesting this was already rather priced-in to the equation. The presser is where things can get interesting for the USD as the focus will be on Powell’s comments and whether he hints towards more than one rate hike on the horizon for 2022.

US Dollar One Minute Chart

SPX Bullish Initial Reaction

2:12 PM ET

Going along with that USD weakness was a quick shot of equity strength with the S&P 500 briefly touching up to another fresh all-time-high. The move has since pared back a bit, but still net positive since before the statement release.

SPX 15 Minute Price Chart

USD Back to Pre-Release Levels

2:23 PM ET

Powell hasn’t even sauntered up to the lecturn yet and already the USD has snapped back to pre-release levels. DXY was 94.05 ahead of the statement and currently trades above the 94 handle with a little over 5 minutes until the presser begins.

USD One Minute Chart

SPX Back Up Towards Highs Ahead of Presser

2:29 PM ET

Presser is about to begin but stocks are right back up towards the ATH that was set just after the statement release, and above the prior ATH from yesterday of 4627.

SPX One Minute Chart

Yen Weakness

2:34 PM ET

One of the notable takeaways from the first 30 minutes of this rate decision – Yen weakness. The Yen is highly sensitive to rates and and USD/JPY is getting a bump from a key area of support around the 113.80 level.

USDJPY Four Hour Price Chart

Rates

2:39

First question from the presser taken from Nick Tamaros of the WSJ, and he pointedly asked whether the Fed was looking at one or two hikes for next year.

Powell successfully side-stepped. He said ‘supply shortages’ will remain into next year, and inflation should begin to move lower in the second or third quarter.

Powell just said that he thinks the Fed should be patient and that policy will adapt appropriately.

update following…