Opening Statement from the November 2021 Dividend Gems

Opening Statement from the November 2021 Dividend Gems

Originally published on November 14, 2021 (pre-market release)

Fed to Reduce its Bond-Buying Program

During the recent Fed meeting (November 3) Fed chairman Powell announced the highly anticipated start of a reduction to its monthly purchases of $120 billion of U.S. Treasury and agency mortgage bonds, beginning with a reduction of $15 billion ($10 billion U.S. Treasuries and $5 billion mortgage-backed securities) in November, followed by an additional $15 billion in December.

Because the taper announcement was expected by most investors, the 10-year U.S. Treasury yield did not soar and the stock market did not selloff unlike the aftermath of the taper announcement in 2013 which caught investors by surprise. 

The Fed plans to reduce its monthly purchases in a stepwise manner as needed and expects to end the stimulus by June 2022. Meanwhile, Powell emphasized that the end of tapering would not necessarily mean that interest rates would be raised soon after. The Fed intends to begin raising rates once the labor market is near full employment along with moderately elevated inflation. 

It is important to keep in mind that the Fed’s interest rate expectations assume that inflation will subside by mid-2022. Although we generally agree with this estimate, we cannot be certain because high energy prices are adding to the transient nature of inflation and could add to supply chain issues to cause a more lasting inflationary environment.

Inflation Watch

In the Intelligent Investor and other research publications we have been discussing the impact of high energy prices as well as rising minimum wages in many large companies as two factors that could help keep inflation higher than the Fed wants for a longer time. Based on the latest inflation data, we view persistent and/or higher inflation as a higher possibility.

Earnings

With just...