As expected , the fed has maintained its dovish stance for tapering of assets and maintain its short term interest rate near 0%. However it has brought forward expected rate hike from 2024 to 2023. The so-called dot plot of individual member expectations (FOMC projections) pointed to two hikes in 2023.
Based on the two rate hikes in 2023, it is expected that the Fed has to start tapering fairly soon to reach that goal as it takes maybe 10 months to a year to taper at a moderate pace. We are only two years away from 2023.
Tapering of asset purchase would mean that the Fed will start slowing its bond purchase program, this would mean that short , mid and long term interest rates will progressively rise to a expected 2% by 2023 barring no change in message from the Fed.
Markets reacted to the Fed news, with stocks falling and government bond yields higher as investors anticipated tighter Fed policy ahead, including the likelihood that the bond purchases will slow as soon as this year.
So what does all the above entail to retail investors like you and me ?
Well, to begin with, stock prices of bubble stocks WILL start to decline progressively towards their intrinsic value base on the projected hiked interest rates. Already it has started. HOWEVER, if your portfolio is owning great companies / growth companies at well supported price points. You have nothing much to fear.
In fact, i would be starting to build a war chest and get ready to buy great companies at a discount when others sell.
I leave you with another famous message from Buffett.
Despite a sharp drop from its Q2 2020 peak, the 5.8% Q3 unemployment rate still remains uncomfortably high and well above the Fed’s preferred target. More worryingly, the last two monthly Non-Farm Payrolls (NFP) reports have come in below expectations, averaging just a little over 400k net new jobs per month. While this rate of job growth may be acceptable in more normal times, the US labor market is still millions of jobs below its pre-COVID levels and only growing tepidly despite widespread vaccine distribution and economic “reopening” across the country.
In other words, the to-date lackluster labor market recovery following the COVID recession is the reason the central bank is continuing with its unprecedented stimulus measures.
Again, similarly to the week of CPI announcements , I do not foresee any sudden market movements unless there’s freak miscommunication either from the projections or Powell himself.