Fed Focuses on Tapering and Leaves Rate Hike Questions for Another Day

The Fed announced plans to taper in November and December. The announcement didn’t address interest rates cuts. Chairman Jerome Powell separated tapering plans from interest rate plans. Short-term yields have risen the most since the September Fed meeting.

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Key Takeaways

  • The Fed Outlines Tapering Plans for November and December 

  • The Short End of the Yield Curve Has Seen the Largest Gains  

  • Sectors Shuffle on the Fed News 

(Wednesday Market Close) The major indices were mixed throughout the day as investors focused on the Fed’s (Federal Open Market Committee) announcement. However, the Russell 2000 (RUT) wasn’t waiting around for the Fed and broke out of its nine-month rut by breaking resistance and creating a new all-time high. Many investors may see this as a sign that the sentiment is increasingly bullish. After the announcement, the S&P 500 (SPX) and Nasdaq (COMP:GIDS) turned positive on the day and tested new highs of their own.  

For the most part, the Fed announcement came in as expected with plans to taper by reducing its bond purchases by $15 billion per month for November and December. At that rate, the Fed’s stimulus efforts would stop about June of 2022. However, the Fed did say it would be flexible in that it could speed up or slow down the purchases as needed.

The announcement did not address any interest rate hikes, and Fed Chairman Jerome Powell decided to focus on tapering and not address the interest rate issue in his post-announcement press conference. Despite his evasiveness, the Fed funds futures are currently pricing in about a 50% chance of a rate hike by June of 2022 and a more than 90% chance for a rate hike by December of 2022.

Treasury yields rallied on the news. The 5-year Treasury Yield (FVX) rose more than 5% during the day, the 10-year Treasury Yield (TNX) rose about 3%, and the 30-Year Treasury Yield (TYX) climbed about 1.6%.

Fed Bonding

From September’s Fed meeting to November’s Fed meeting, yields have risen across most of the yield curve. The short end of the curve has seen the biggest moves with the 1- and 2-year yields climbing 114% and 109% respectively. Part of the reason for the big numbers is because these yields were so low to start with. In that time frame, the 2-year yield has risen from 0.22% to 0.46%.   

On October 26, Bloomberg reported that the 2-year yield had become a favorite for hedge fund managers speculating in the futures markets. Increased talk about the potential for rate increases in 2022 helped drive the yield higher. The rise in the 2-year yield was pricing in not just one but two possible rate hikes in 2022.

Because of the rise in short-term rates, the yield curve has flattened. When measuring the yield curve, investors commonly use the ratio between the 10-year and the 2-year yields. After the September Fed meeting, the 2-year yield was 0.22% while the 10-year yield was 1.33%. Before the November announcement, the 2-year yield was 0.46% and the 10-year yield was 1.42%. The 2-year yield rising faster than the 10-year yield is causing the flattening effect.

Tech and Semiconductors
CHART OF THE DAY: CATCH UP. The PHLX Semiconductor Index (SOX—candlesticks) has trailed the S&P Technology Select Sector ($IXT—red) over the last three months but has been recently closing the distance. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Pulling Up the SOX

The PHLX Semiconductor Index (SOX) continued to rally on the news, putting together a five-day up streak. Because technology stocks are often sensitive to rising interest rates, this could be a good sign that the Fed’s actions were already priced into the market. One of the Fed’s goals has been to telegraph its actions and avoid surprises. It appears it has been successful in this area.  

The semiconductor group helped push the Technology sector higher. The S&P Technology Select Sector Index ($IXT) rallied more than 0.57% on the news. However, Consumer Discretionary, Materials, and Consumer Staples were the top three sectors for the day. Energy, Utilities, and Industrials finished the day in the red. 

Good Trading, 



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Key Takeaways

  • The Fed Outlines Tapering Plans for November and December 

  • The Short End of the Yield Curve Has Seen the Largest Gains  

  • Sectors Shuffle on the Fed News 

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