FOMC Day: Dovish Tapering or Hawkish No Rate Change?

Yield curve steepens, equities hit all-time highs as Fed announces taper. The Fed’s widely-expected taper announcement and subsequent press conference sent Treasury yields and swap rates higher as the FOMC tried to acknowledge the market’s inflation concerns while still maintaining flexibility around rate hikes- leading some to depict the Fed’s decision as a “dovish taper.” Swap rates and Treasury yields rose across a steepening curve in response- 2-year rates climbing even higher despite Fed Chair Powell down playing rate hikes while the 10-year rose 5+ bps to close above 1.60%. Meanwhile, equities climbed to yet another record – all three major equity indices closing on record highs as the Fed helped fuel a risk-on move.

FOMC meeting concludes with taper announcement, ending historically accommodative liquidity program. The Fed’s well-telegraphed taper will begin as early as mid-November, and will reduce the amount of bonds the Fed buys by $15B each month- winding down purchases to $0 if the taper continues unabated through June 2022. While Fed Chair Jerome Powell has repeatedly looked to delink the start of tapering and an increase to policy rates, it’s unlikely that the Fed would have raised rates while it continued to purchase Treasurys and mortgage-backed securities. The Fed’s comments around inflation were also closely parsed, the FOMC tweaking language in its statement to suggest that while inflation remains elevated, the factors driving price increases are “expected to be transitory.” In his press conference, Powell continued to try and strike the balance between acknowledging the market’s concerns around inflation while still not committing to a timeline for rate hikes, saying that while its not a good time to raise rates, the Fed would “not hesitate to act” if high inflation did not subside.

Private payrolls, ISM Services Index reveal robust labor market and economic activity. Markets got a bevy of good news from today’s economic data releases. The ADP employment report showed private payrolls grew by 571,000- much more than the 400,000 forecasted. Markit’s Purchasing Managers Index showed robust activity while the ISM Services Index rose to 66.7- the highest level on record. Elsewhere, durable goods orders fell less than expected while capital goods orders increased month-over-month.