First Fed Rate Hike Could Come In 2022; Dow Jones Rallies

The Federal Reserve on Wednesday held off on a final decision to start tapering asset purchases, but policymakers are evenly split over whether the cycle’s first rate hike should come next year, not in 2023. The Dow Jones, up strongly before Wednesday’s 2 p.m. ET policy news, rallied further despite the mixed hawkish-dovish Fed meeting outcome.


The Dow and broader stock market may stay volatile as investors react to Fed chief Jerome Powell’s 2:30 p.m. ET press conference. Powell is seen as one of the Fed’s most dovish members, behind the shift to not just tolerating but welcoming inflation above the 2% target.

Federal Reserve Economic Projections

The dot-plot, tracking each Fed policy committee member’s individual outlook, had 9 of 18 penciling in one quarter-point rate hike in 2022. That was up from 7 of 18 favoring a 2022 tightening in June projections. However, 3 of the 9 favoring a 2022 rate hike actually think two rate hikes will be warranted next year. That lifted the median projection to 0.3% from the current rate, which targets the midpoint of 0%-0.25%.

One caveat: While Powell and other Fed governors vote at every meeting, regional bank presidents get to vote on a rotating basis.

The Fed projections bumped up the outlook for the central bank’s favored measure of inflation, the personal consumption expenditure price index. Now projections show PCE inflation of 2.2%, up from 2.1% in June.

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No Taper Tantrum

So far the Federal Reserve has handled risk of a 2013-style taper tantrum with impressive dexterity. Despite Fed chief Jerome Powell revealing his support for a 2021 start to tapering at his Aug. 27 press conference, the S&P 500 finished that session at a then-record high.

The Fed is buying $120 billion in assets per month. That includes $80 billion worth of Treasuries and $40 billion in government-backed mortgage securities. The Fed statement Wednesday said that “a moderation in the pace of asset purchases may soon be warranted.”

Stay tuned for a taper announcement at the Nov. 2-3 meeting.

Dow Jones, Treasury Yield Reaction To Fed Meeting

After the Fed’s 2 p.m. policy statement and release of quarter economic projections, the Dow Jones was up 1.3% in Wednesday’s stock market action. The S&P 500 rose 1.2% and the Nasdaq composite 1.15%.

Both the Dow Jones and S&P 500 remained below their 50-day lines, but the Nasdaq rally carried the tech-heavy index back up to that key technical signpost.

The Dow Jones had a rocky start to a Fed-focused week amid fear that insolvency at China’s Evergrande real estate group could force a tough restructuring of the country’s property markets. Economists warned of a potential cut to Chinese GDP growth that could be big enough to have a global impact, with commodities prices could take the worst hit.

The Dow slid 1.8% on Monday then dipped 0.15% on Tuesday.

Overnight news that Evergrande got past one payment deadline without defaulting sparked Wednesday’s rally. That suggested that Beijing might step in to ensure a slow-motion restructuring, rather than allow a Lehman-like trainwreck.

As global growth concerns weighed, the 10-year Treasury yield slipped 6 basis points this week to 1.31% ahead of the Fed policy news. Treasury yields failed to bounce on relief over Evergrande, then eased a bit more after the Fed meeting ended.

Be sure to read IBD’s after-the-close The Big Picture column each day to get the latest analysis of the market trend and make sure growth investors have a green light.

Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.


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