HIGHER STOCK INDEX FUTURES DESPITE LESS CENTRAL BANK ACCOMMODATION?


Stock index futures have advanced to fresh highs in recent weeks. These historical gains have taken place despite investors’ concerns that inflation will remain high for longer than expected, which could force central banks to tighten credit policies sooner. Major central banks this year have already reduced some of their accommodation in one form or another.


The minutes from the September Federal Open Market Committee meeting revealed the central bank was reviewing plans to start reducing its bond-buying stimulus program in November and to possibly end the asset purchases entirely by the middle of 2022. The minutes revealed a stronger consensus of how to begin scaling back the $120 billion in monthly purchases of Treasury and mortgage-backed securities.


That is exactly what the Federal Open Market Committee did at its November 3 policy meeting. The Federal Reserve approved plans to begin scaling back its bond-buying stimulus program and completely end it by June 2022. The Fed indicated that it will reduce its bond purchases by $15 billion a month in November and by an additional $15 billion in December. In addition, it said similar reductions in the pace of net purchases “will likely be appropriate each month,” though officials will be prepared to adjust that pace “if warranted by changes in the economic outlook.” In advance of the Federal Open Market Committee meeting, economists correctly anticipated the Federal Reserve would announce a $15 billion reduction in the central bank’s monthly asset purchases.


Chart 1: S&P 500 Futures - Weekly


Source: Chart from QST


Federal Reserve Bank of St. Louis President James Bullard said that he is open to allowing the central bank’s massive holdings of cash and bonds to shrink at some point. Mr. Bullard, who was speaking in a virtual appearance, was commenting on what he would like to see happen once the U.S. central bank winds down the process of expanding its holdings.


There has been a growing consensus that central banks are behind the curve, meaning the U.S. Federal Reserve and other central banks will likely bring forward interest rate hikes. Federal Reserve officials are mostly on board for a higher fed funds rate, but it is not unanimous.


James Bullard said the U.S. central bank needs to move more forcefully to confront high inflation levels, and Federal Reserve governor Michelle Bowman warned of the growing risks that supply-chain disruptions could keep inflation elevated for longer than forecasters have predicted.


IN ADVANCE OF THE FEDERAL OPEN MARKET COMMITTEE MEETING, ECONOMISTS CORRECTLY ANTICIPATED THE FEDERAL RESERVE WOULD ANNOUNCE A $15 BILLION REDUCTION IN THE CENTRAL BANK’S MONTHLY ASSET PURCHASES.


12 | ADMISI - The Ghost In The Machine | Q4 Edition 2021


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