The Federal Reserve didn't change any policy but seems closer to announcing a taper of asset purchases in the coming months. This meeting also featured an update of members' dot plots which give increased clarity about the path of the economy, inflation, and rates. On the margin, members' concerns about inflation seem to have risen which pushed up rates in Fed futures markets.
In its statement, the Federal Reserve Open Market Committee (FOMC) said: "If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted." Most analysts expect the taper to begin something in November or December. This hasn't changed despite some turbulence due to Evergrande in China and the most recent coronavirus wave driven by the highly contagious Delta variant.
In his press conference, FOMC Chair Powell said, "While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate." Powell also said the Fed is getting closer to achieving its inflation and employment goals.
Markets finished higher on the day as they came off from oversold levels but stocks did back off from the highs of the day. Yields also finished higher on the day on the long-end with the short-end slightly contracting.
The major impact on the markets seemingly came from the dot plot which showed members downgraded their growth forecasts while increasing their inflation forecast. The FOMC forecasts GDP increasing at 5.9% this year vs 7% in June. It also downgraded its 2023 forecast to 3.3% from 3.8%. This year's inflation forecast is 3.7% which was an increase from 3% in June. They also slightly increased the forecast for inflation in 2022 to 2.3% from 2.2%.
Stocks initially fell on the report's hawkish lean but recovered these losses in the overnight session. So far, this price action seems to confirm that the market's latest bout of weakness was yet another buy the dip opportunity as the Fed's bad news of an imminent taper and upgrade of inflation forecasts was met with enthusiastic buying.