NEW YORK – Investors are bracing for the last Federal Reserve meeting of the year, with market participants hungry to learn how quickly the central bank plans to finish unwinding its bond-buying program and pick up signs of when it may start to raise rates in 2022.
Stocks are back at record highs following last week’s selloff — a market spasm brought on by worries over the Omicron variant of the coronavirus and comments from Fed Chairman Jerome Powell, who said the central bank may discuss speeding up the reduction of its $120 billion per month bond buying program at next week’s meeting
There is potential for renewed volatility, however, if the Fed takes a more hawkish than expected view on rolling back the easy money policies that have helped stocks more than double from their March 2020 lows, including a rapid reduction in bond buying that clears the way for the central bank to raise rates sooner.
Markets could also be roiled if the Fed signals greater worry about inflation, which Powell said can no longer be described as “transitory.” Data on Friday showed consumer prices last month notched their largest annual gain in nearly four decades, bolstering the case for higher rates)
“The biggest factor in the equity market remains and will remain to be interest rates,” said Jack Ablin, chief investment officer at Cresset Capital Management.
Higher yields – which can rise on expectations of tighter monetary policy – can dim the allure of stocks by creating a greater discount for companies’ future cash flows, potentially pressuring valuations that are already elevated by historical standards.
