- The Federal Reserve holds its two-day meeting on Dec. 14 and 15. The central bank is expected to discuss speeding up the end of its bond-buying program.
- If the Fed decides to taper its bond purchases more quickly, it could also begin to raise interest rates faster. Investors will be closely watching for the Fed's new interest rate forecasts.
- There is some important data due in the week ahead, including producer price inflation on Tuesday. The retail sales report is out on Wednesday, and industrial production will be released Thursday.
In the coming week, the Federal Reserve could decide to speed up the end of its bond-buying program and signal that it expects to start hiking interest rates in 2022.
That is already widely anticipated by investors, ahead of the Fed's meeting Tuesday and Wednesday. Strategists don't expect much market reaction, unless the central bank's messaging includes a surprise or its forecast for interest rate hikes is more aggressive than expected.
In testimony before a Senate panel on Nov. 30, Federal Reserve Chairman Jerome Powell tipped the warning that the central bank would discuss speeding the taper of its $120 billion monthly bond purchases at the December meetings. His comments followed a parade of Fed speakers, who all suggested the central bank could end the program sooner than the current timeline of June 2022.
In the past week, stocks resumed their climb back toward highs after it became clear the omicron Covid variant is unlikely to cause a shutdown of the economy. Pfizer and BioNTech also gave investors some encouragement when announcing that a study found three doses of their vaccine provides a high level of protection against the variant.
For now, a calm reaction to higher prices
Stocks rose on Friday, with the S&P 500 adding 0.9%, to a record close of 4,712.02. The Nasdaq Composite gained 0.7%, and the Dow Jones Industrial Average climbed 0.6%.
The three major indexes also notched strong weekly gains: The S&P 500 rose 3.8% and the Nasdaq added 3.6%. The Dow was the outperformer with a 4% jump.
Investors largely shook off November's inflation print in which the consumer price index gained 0.8% for the month and 6.8% over the previous year — the highest rate since 1982. The core CPI, which excludes food and energy prices, added 0.5% for the month and gained 4.9% from a year ago — the sharpest increase since 1991.
Bond yields rose during the week, but the 10-year Treasury yield traded at about 1.48% Friday afternoon.
"The bond market is taking some comfort in the Fed doing its job to address inflation," said David Bianco, chief investment officer for the Americas at DWS Group. "To put this in context, if you go back to the 1960s, the average hiking cycle was 400 basis points." One basis point is equal to 0.01%. That would mean four percentage points in rate hikes.
"Since 1982, if you start with the post great inflation period of the 1970s and early 1980s, since then the average hiking cycle is more like 250 to 300 basis points. The last cycle we got to 225 [2.25%]" Bianco said.
"We've seen it has taken less. Maybe there's a silver lining in that inflation is surprising the Fed," he added. "It's causing the Fed to act a little sooner and hopefully the message is also received on the fiscal side and they're a little more right-sized and targeted in their spending."
Bianco expects two quarter-point rate hikes next year, with the first in June. The following year, the Fed could increase interest rates four more times, but he does not expect the fed funds rate to get much higher. The fed funds rate is the interest rate at which large banks lend to one another overnight.
Upcoming projections from the Fed
The central bank is expected to release its quarterly projections for the economy, inflation and interest rates when it releases its statement at 2 p.m. ET on Wednesday. Powell will brief reporters at 2:30 p.m.
The bond-buying program, known as quantitative easing, was put in place in early 2020 to help the economy and financial markets combat the impact of the pandemic. The Fed also had quickly slashed its fed funds target rate to zero.
In its last forecast, the Fed's so-called dot-plot chart of inflation forecasts shows that half the Fed officials expected one or two rate hikes next year, but there was no consensus for a hike. The first hikes were in 2023. That is likely to change in the updated forecast, with possibly two hikes penciled in for next year.
Powell also acknowledged during his recent testimony that inflation could be more of a problem than the central bank thought, and that it was time to retire the description of inflation as "transitory," or temporary. Indeed, the consumer price index for November surged to its fastest rate in nearly 40 years.
Economic data to the forefront
There is some fresh inflation data in the week ahead. The producer price index is reported Tuesday. Other economic reports include retail sales Wednesday, and industrial production on Thursday.
Bianco said the market is now fixated on the economy, which likely has surged this quarter compared to the tepid 2.1% annual growth rate of the third quarter. Economists expect an average 7% growth rate for gross domestic product in the fourth quarter, according to the CNBC/Moody Analytics Rapid Update survey of economists.
"In many ways, this cycle has aged quickly. The cycle is 2 years old, going on 7," Bianco said.
Patrick Palfrey, senior equity strategist at Credit Suisse, also said the market's focus is heavily on the economy as the Fed moves closer to raising interest rates. A strong economy allows the central bank to hike, and the market should keep going higher, Palfrey said.
Credit Suisse strategists raised their 2022 forecast for the S&P 500 to 5,200 in the past week because of the strong economy and improving earnings and margins.
"At the end of the day, the Fed may have only recently changed their messaging on let's say 'transitory,' but in reality, investors have been following the yield curve and inflation and the various dynamics, as well," Palfrey said. "It doesn't come as a surprise to many market participants that the Fed found themselves behind the curve and had to correct policy."
Week ahead calendar
Fed begins two-day meeting
6:00 a.m. NFIB small business survey
8:30 a.m. PPI
Earnings: Lennar, Trip.com
7:00 a.m. Mortgage applications
8:30 a.m. Empire manufacturing
8:30 a.m. Retail sales
8:30 a.m. Import prices
10:00 a.m. NAHB
2:00 p.m. FOMC rate decision
2:30 p.m. Fed Chairman Jerome Powell briefing
4:00 p.m. TIC data
8:30 a.m. Jobless claims
8:30 a.m. Building permits
8:30 a.m. Housing starts
8:30 a.m. Philadelphia Fed
9:15 a.m. Industrial production/capacity utilization