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Fed taper elicits market yawn



The Federal Open Market Committee (FOMC or Fed) announced at its November 3, 2021, meeting that it will reduce monthly bond purchases by $15 billion in late November and another $15 billion in late December. If it continues to taper bond purchases at this rate, there will be no more net bond purchases after mid-June of 2022. The decision was widely expected. Bond yields and the dollar moved very little after the announcement; stock prices rose slightly.

During the press conference after the meeting, Fed Chair Jerome Powell stressed that the FOMC is a long way from raising interest rates. The two key tests for a rate rise are (1) inflation has been moderately above the 2 percent target so that the longer term average is close to 2 percent and (2) employment is judged to be close to its maximum sustainable level. Powell refused to say whether the first test has been met, asserting instead that there is broad agreement within the committee that the second test is far from being satisfied. He did say that by the time the second test is met it could well be the case that the FOMC would judge that the first test has also been met.

The current pattern of bond yields suggests that market participants expect the Fed to raise rates about half a percentage point in the second half of 2022.

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