The purpose of the Federal Reserve (according to the Federal Reserve) is to enact the monetary policy needed to help the country achieve maximum employment and price stability. Normally, this goal is achieved through the adjustments of federal funds (interest) rates; and in extreme circumstances, bond purchases and the expansion of their balance sheet.
Prior to the FOMC meeting this week, the general market consensus was for that the Federal Reserve was going to hike rates 3-4 times in 2022, completely taper their bond purchases by March, and rollout a plan to shrink their colossal balance sheet.
During the Fed meeting this week, in order to “adapt to the evolving economic environment,” the Fed issued a more dovish-than-expected statement (keeping rates unchanged at 0-0.25% and ending asset purchases in March as expected) followed by a more hawkish-than-expected press conference, citing a strong labor market and inflation being “well above” it’s 2% target rate for so long.
After the FOMC meeting this week, the markets initially reacted positively to the dovish sentiment before being crushed by the hawkish tone from the press conference.
In all fairness, the hawkish tone and the taper tantrum is warranted for the same reasons they cited in the meeting. However, what was rather astonishing was the immediate market reaction, even after the correction we’ve seen in the last couple months. But from the market’s perspective, the Fed had been pumping liquidity in and driving equity prices up for the last two years on top of the dovish policy for the preceding decade. Any announcement of a liquidity vacuum will provoke at least some kind of sell-off; apparently even after it was expected.
So cheers (I guess),
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