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All Eyes on Fed Policy, Powell Speech

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Wednesday, September 22, 2021

Market participants are filling in some of the early-week selloff this morning, ahead of the Fed’s report due in the early afternoon regarding monetary policy going forward. Chair Jay Powell & Co. is expected unveil a new dot-plot regarding the tapering of asset purchases worth $120 billion per month ($80 billion in Treasury securities and $40 in mortgage-backed securities), and perhaps hint toward a timeline of raising interest rates from near-zero.

Prognosticators anticipating Powell being influenced by outside pressures to move on monetary policy have mostly come up empty so far: Powell has shown rigid determination to let the liquidity in the market slosh around until not only inflation heats up past the optimum +2%, but also so that the labor market can pull itself back up to something like full employment. Thus, chances of the Fed making a move today are still up in the air, regardless how much assurance these prognosticators may issue ahead of 2pm ET today.

One important aspect to predictions the Fed “can’t” move today has to do with the same thing that took down the markets -2% Monday: signs that China’s economy may be slowing significantly. Real estate giant Evergrande’s inability to pay a large bond come due this week shook global markets. But really, it was just the latest hard-line move from the Chinese government to punish risk-taking. However, this morning we find out the government blinked; Evergrande’s payment this week is settled.

Inflation has been running hotter than 2% across the board this summer, and economic data (including Q3 earnings, which are beginning to trickle in) will let us know how hot we are this fall. Should the Fed continue backstopping the economy with these emergency buybacks, which were enacted back at the start of the pandemic? We know Powell believes inflation is “transitory,” but aren’t things like wage hikes more permanent than that?

Anyway, that’s what’s on tap for today. Another important issue from the last time the Fed met was the Delta variant of Covid-19 marching through the South, taking down regional economies and putting a dent in the Great Reopening. Today, though Covid infection rates are very high, mostly among the voluntarily unvaccinated populations of the U.S., vaccine mandates and other incentives — including discussion of booster vaccines improving chances of not getting sick from Covid — have assuaged those fears.

Indexes have slid a tad from early morning pre-market trading, but still nicely in the green: the Dow +190 points, the S&P 500 is +25 and the Nasdaq +60 points. Obviously, this afternoon’s Fed news is the pivotal moment for investors today, but it’s not keeping many participants from placing their bets ahead of time.

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