Fed talks taper but its all transitory

• The Fed as expected left rates unchanged on Wednesday.
• Tapering is finally to begin at the rate of $15 billion a month.
• Transitory inflation, well we will have to see about that.

The Federal Reserve as expected left interest rates unchanged on Wednesday in a widely telegraphed move. The Fed never likes to surprise markets too much and stuck to the well-flagged script. Signaling the beginning of the end of the massive bond-buying stimulus program that propped up the economy and notably equity markets since the pandemic began. However, the Fed is determined to get value for money from the transitory printing press as it sticks with its oft-stated view that inflation will be transitory. At least they did admit that it may be transitory for longer, if that makes sense! " Inflation is elevated, largely reflecting factors that are expected to be transitory," Powell said. "With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen". On a lighter note, Fed Chair Powell is asked to explain transitory and says it does not leave a permanent persistent mark on prices and inflation. Clearly this is where the test lies and so far the equity market feels the Fed is not behind the curve. The currency and bond markets are not so sure.

The Fed is to buy $60 billion in Treasuries during December and $30 billion in Mortgage Backed Securities (MBS). That's $10 billion fewer Treasuries and $5 billion less in MBS. Still, a significant amount thought so this taper is treading carefully. 

The equity market reacted as only they can, positively. No news can dent this juggernaut just yet and certainly a meek and well-flagged taper is not going to do the trick. The dollar too has struggled for direction post the decision whipsawing around 1.16 but slightly weakening for now. US yields quickly spiked with the curve steeping but this has abated and 2-year yields remain little changed at 0.47%, 10 year at 1.57%, and 30 year at 1.98%. 

Overall a solid and cautious approach from the Fed with the risk perhaps of straying too far behind the curve just about put to bed. Equity markets are within striking distance of more all-time highs and VIX, a measure of volatility in the equity market, is falling to the low end of the recent range at 15. MOVE, a measure of bond market volatility, has also dropped but this one is elevated compared to the recent past, indicating the bond market may be about to have a showdown with the Fed. For equity people, risk is on so more gains are likely.

EuroUSD 15 minute.

Equities are clearly happy!

S&P 500 15 minute