Federal Reserve announced “turbocharged” tapering and three interest rate rises for 2022 yesterday. Markets rallied with the DJIA rising by 383 points (1.08%) and the Nikkei by 606 points (2.13%). Markets have continued to rally today.
Many have wondered why? Doesn’t rising rates hurt the levered investors and corporations?
I think that the main reason for the rally is ‘normalization’. We’ve been under ultra-easy monetary policy for years and under emergency measures (extensive asset-purchase programs) since spring 2020. They all create a sense of uncertainty. When the Fed took steps to remove them, many consider that ‘normality’ is returning, and that’s bullish.
Like Tweeted by Daniel Lacalle, the decision also was the “most dovish hawkish statement ever”. The fact remains that the Fed is seriously ‘behind the curve’. Inflation will, most likely, not ease, but accelerate.
I am anticipating that by early next year, Fed will be forced to start an aggressive hiking cycle due run-away inflation. That would be poison for stock and credit markets, so let’s hope that I am wrong.
The ECB kept rates unchanged, and announced the end of net asset purchases (tapering) under the Pandemic Emergency Purchase Program, or PEPP, by March 2022. The ECB also stated that:
From October 2022 onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates.
In plain language this means that the ECB will (must) keep supporting the bond market of the Eurozone, because otherwise it would collapse taking the common currency with it.
However, the ECB is playing with fire. Inflation is running rampant, e.g., in Germany, and it may very well force the hand of the ECB to rate rises sooner than many think. Otherwise, we may enter into an inflation crisis in the Eurozone next year.
The Bank of England did what any responsible central bank should do, that is, it rised rates to 0.25%. Not much, but it gave a signal. I am rather certain that other central banks are forced to, aggressively, follow early next year.