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Market Watch Weekly | December 17, 2021 | Merry Christmas & Happy Holidays!

Erik Dekker - Dec 17, 2021
In the midst of the omicron scare, Fed Chair Jerome Powell unsettled markets this week with a somewhat hawkish pivot in a couple of notable areas. First, he suggested that the word "transitory" be retired when discussing inflation.

In the midst of the omicron scare, Fed Chair Jerome Powell unsettled markets this week with a somewhat hawkish pivot in a couple of notable areas. First, he suggested that the word "transitory" be retired when discussing inflation – implicitly acknowledging that inflationary pressures have been more persistent than the Fed had expected.

The second pivot from Chair Powell came around the path of the Fed's taper. Powell noted that accelerating the path of the Fed's balance-sheet tapering "by a few months" could make sense, as it would allow some flexibility around when the FOMC could start raising rates, particularly if inflation continues to remain stubbornly high. This notion was touted by several Fed governors in the prior weeks, as well.

For those that missed it, on Wednesday the US Fed announced an accelerated balance-sheet tapering process: The pace of tapering will increase from $15 billion per month currently, to close to $30 billion per month. This would allow the Fed to wind down its tapering process by the first quarter of 2022, which would place Fed policymakers in a position to raise interest rates — their more traditional and more powerful tool — sooner, and if needed. The Fed has made clear it wants to end its bond-buying program before it raises rates, which would cool off demand by making it more expensive to borrow for a home, a car or expanding a business. That would in turn weigh on growth and, eventually, price gains. The Fed’s new economic projections suggested rates, which have been at rock-bottom since March 2020, might rise to 2.1% by the end of 2024.

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