The Us Federal Reserve is about to rein in its money printing — what does that mean for markets?

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Before we get started this morning, a quick reminder: ON October 20, I’ll be hosting a webinar with Roland Arnold, manager of blackRock’s Small Company Investment trust. We discuss his views on the prospects for small businesses in the UK in the context of current supply chain disruptions and the reopening of the economy.
Don’t miss it (especially if you’re a fan of small-cap investing)- sign up for this webinar now. It’s free, and even if you can’t watch it that day, it lets you catch up later.
Ok, back to today.
Last night, we had a meeting of the U.S. central bank, the Federal Reserve. This is the first time we’ve mentioned it in this week’s Money Morning, which shows what a busy week it has been.
However, this is a rather important meeting. This is when the Fed will tell us how quickly it might try to return to “normal” monetary policy.
Surprisingly, the answer is “sooner than you think”.

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The Fed’s language was more hawkish than expected
For years — even decades — few have bet that the Fed would be more hawkish (ie, more aggressive in tightening monetary policy) than expected. Usually, it’s a good idea to bet another way.
But yesterday Jerome Powell, fed chairman, bucked the trend. He said the US appeared ready to face the policy of “taper” (click the link for a video explaining the policy, but in reality it just refers to the current tapering of quantitative easing).
It looks as if it will start in November, and it sounds like, if all goes according to plan, it could be finished by the middle of next year. That’s faster than the market expected — and it’s worth remembering that all this happened before the Fed even considered raising rates.
So one reason for the swifter shift is that Fed members-the “dot plot” shown in the chart (which shows where each Fed member thinks interest rates will be at a given point-think the central bank will need to start raising rates more than it did earlier.
It’s also interesting to note that in his press conference, Powell didn’t try to push back. In fact, he knows full well that he doesn’t need a shocking jobs report, for example, to think he’s ready to cut spending. He’s basically ready.
So we’ve gone from a relatively dovish tone to a fairly hawkish tone in a very short period of time. What has changed? More importantly, why did the markets basically shrug their shoulders?
The answer, of course, is “I don’t know”. But I can take a guess.
One is that markets have already reacted. I disagree with people who think that the market doesn’t care about Evergrande — it’s a slow burner but it’s still a big problem, but you could argue that the recession earlier this week and the fed’s fears at the end of last year took off, not China’s woes.
Another reason is that inflation is starting to worry investors. They are finally realising that they would rather have a Fed that is confident in the recovery and willing to step in to tackle inflation than one that constantly hedges, dodges and dodges difficult issues.
Finally, we need to remember where we started. The economy (for all the worries about Delta and the supply chain) is booming. However, interest rates remain at 0% for another nine months. So the Fed is only relatively hawkish; We are still considering a substantial easing of monetary policy.

 

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