What is the result of this week's meeting?
Investors are preparing for the Federal Reserve’s (Fed) year -end meeting with market players curious about the pace of the central bank’s plans for a bond -buying program as well as signals the start of a rate hike in 2022.
Shares rebounded after last week's sell-off amid market concerns over the Omicron Covid-19 variant and Fed chairman Jerome Powell's comments on the central bank's talks to accelerate its US $ 120 billion-a-month bond-buying reduction program this week.
There is renewed volatility potential but if the Fed takes a more hawkish -than -expected view for a money supply reduction policy that helps double stocks from March 2020 lows and reduced bond purchases, it will pave the way for central banks to raise rates faster.
Markets are also in turmoil if the Fed signals concerns about inflation which Powell said should not be described as ‘temporary’.
Meanwhile, higher treasury yields will increase based on expectations of monetary tightening policies that could reduce the attractiveness of stocks with large discounts on the company's cash flow.
According to Refinitv Datastream, the S&P 500, which jumped 25% this year, is trading 20.5 times its estimated earnings for the next 12 months compared to its historical valuation average of 15.5 times.
The yield of the benchmark 10 -year treasury note jumped 15 basis points from the beginning of the month to 1.49% but was below the 1.776% achieved in March.
Several stocks faced high anxiety rates this year including technology and growth companies that grew rapidly during the 2020 close.
According to BofA Global Research analysts, broad markets are generally absorbing a tightening of monetary policy that has seen stocks mostly rise as the Fed has been on that track for the past decade.
The Fed has begun tapering for purchases of treasury and mortgage securities that are expected to end by mid -2022.
Following Powell's comments, investors believe the Fed will accelerate a rate cut that will end bond purchases by March which would allow the potential central bank to raise rates earlier.
Investors are also interested to know the central bank’s views on the potential impact of the Omicron variant on economic growth or inflation.
