Cliffhangers are not the style of Powell Fed.
Economists think Fed Chairman Jerome Powell has given away the plot twist of the meeting next week. In two days of testimony to Congress last week, Powell opened the door for the central bank to announce it is doubling the monthly pace of asset purchases to $30 billion from $15 billion, consistent with quantitative easing ending in mid-March instead of mid-June.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics said Powell's comments last week were very strong guidance that they are going to increase the speed of the tapering.
The Fed adopted the $15 billion pace at the beginning of November.
A change in course was just six weeks after the Fed tapering announcement sounded implausible a month ago, but the signals are mounting and market conditions are supportive, said Ryan Boyle, senior economist at Northern Trust.
The Fed received sticker shock because of the strength of inflation in October. With inflation at a 30 year high above 6%, Fed officials want to be prepared to raise interest rates if needed. The central bank doesn't want to be raising rates while it is still buying securities, which is akin to hitting the accelerator and brakes at the same time.
Powell also previewed an important shift in the central bank's messaging during his testimony last week.
Since last year, the Fed has assumed inflation would lag behind and that the Fed could patiently nurture the labor market back to full strength, known as maximum employment. The unemployment rate fell below 4% in early 2020, which was where the Fed wanted to get it back to normal.
The plans have been upset by high inflation.
The risk of persistent high inflation is a major risk to getting back to a strong labor market, Powell said.
Michael Gregory, deputy chief economist at BMO Capital Markets, said that the Fed rate hikes could occur as early as the spring as part of what unfolds on the COVID.
Three rate hikes are coming up next year, coming in March, June and September, according to economists at Barclays.
On the other hand, economists note that being prepared to raise rates and actually pull the trigger are two different things.
TD Securities is sticking to the view that inflation and growth will slow down next year, precluding any rate hikes until late 2023.
In the short term, the real impact of the Fed's pivot on the economy will be tighter financial conditions.
Bostjancic said that the Fed s shift away from easing will mean tighter financial conditions.
There have already appeared signs of this, with increased volatility, weakness in stocks tied to low interest rates. Bostjancic said that tighter financial conditions may serve as a brake on high high hopes that the Fed can lift its benchmark interest rate at some point down the road. That is a story for another day.
Stocks of the DJIA, SPX, were higher on Monday because of concerns about the omicron variant.