Markets changed direction and began to rally on Wednesday as investors pondered the Fed's last fiscal policy decision for 2021, which came amid continued inflationary pressures.
Following the first hours of the day in negative territory, the S&P 500 and Dow indexes closed in green. Bond rates climbed immediately after the Federal Reserve's 2:00 pm policy statement, with the benchmark 10-year Treasury yield rising by more than three basis points to exceed 1.47%.
On Wednesday, investors focused on the Fed's fiscal policy announcement. In this, the Fed indicated that it would accelerate the removal of its post-crisis stimulus measures. The Federal Reserve increased the speed of tapering its asset purchases to $30 billion per month.
Originally, from the beginning of the coronavirus crisis through November, the Federal Reserve's asset purchase program consisted of $120 billion a month in combined Treasuries and agency mortgage-backed securities. The Fed started reducing these purchases by $15 billion the previous month and projected an additional $15 billion cut for December.
The Fed's latest Summary of Economic Projections, or "dot plot," indicated that many interest rate rises are anticipated next year. According to the new estimates, the average member of the Federal Open Market Committee forecast three rate hikes in 2022, then four in 2023, and an additional two in 2024. This depicted a faster tempo of rate rises than the Fed's September dot plot predicted.
The strengthening economic growth and rising inflation have given the central bank leeway to adopt more aggressive policies. In November, the CPI indicated the most significant increase in U.S. consumer prices since 1982 on an annualized basis. In addition, the U.S. Producer Price Index grew a record 9.6% from a year earlier, according to statistics released on Tuesday.
The Fed's most recent press release indicated that policymakers were paying attention to increasing costs.
According to it, supply and demand imbalance associated with the virus outbreaks and economic recovery continues to drive inflation.
Some experts remarked that recent trade actions suggested the market was already pricing in a more aggressive Fed. During Tuesday's session, technology and other growth stocks were among the main losers in the main indexes, with the Nasdaq down over 1%.
Art Hogan, national chief market strategist, said that growth stocks or long-term growth stocks are likely to suffer the most when interest rates are expected to rise. When you perform that NPV calculation with a higher interest rate, the inferred multiple or attributed multiple to growth names enters the picture. So a lot of stuff has already been factored in. When it comes to actual growth companies, momentum names, and risky assets, there has been a lot of carnage.
"The market is telling us that you need a barbell approach with growth on one side when you assemble your asset allocation strategy for next year - you want to have growth names valued at multiples to profits, not revenue multiples, cash flow multiples, or sales multiples," he noted. "We predict that 2022 will be similar to 2021 in terms of achieving a balance between growth and value."
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