Federal Reserve Chair Jerome Powell and his colleagues have been walking a fine line. They don’t want to ignore COVID-induced economic damage, but they also don’t want to overstimulate the economy.

In other words, they’re just trying to do their jobs. But that hasn’t stopped political partisans from putting enormous pressure on the Fed to either get more hawkish or more dovish. This week, the Fed decided it was prudent to get more hawkish. Wall Street applauded.

At the conclusion of its two-day Federal Open Market Committee (FOMC) meeting Wednesday, the Fed announced that it would double the reduction of its asset-purchase program, from $15 billion to $30 billion a month.

Investors were reassured that the Fed is taking serious steps to keep inflation under control, rather than let it run amuck. Holding the taper in abeyance would have been worse, because it would have signaled that the Fed is worried about Omicron’s effect on economic growth.

On Wednesday the main U.S. stock market indices climbed as follows: the Dow Jones Industrial Average +383.25 (+1.08%); the S&P 500 +75.76 (+1.63%); the NASDAQ +327.94 (+2.15%); and the Russell 2000 +35.56 (+1.65%).

In pre-market futures trading Thursday, stocks were surging again. Optimism has returned to the equity markets.

Global equity benchmarks also are rallying on the Fed’s news, as overseas investors respond favorably to the carefully calibrated monetary policy of the world’s biggest economy.

Read This Story: Worried The Economy Is Tanking? Don’t Be

Every Fed official is calling for at least one rate hike in 2022, a big shift from September, when half of the central bankers suggested that interest rate increases wouldn’t be needed until at least 2023.

The Fed now projects rates will stand at 0.9% at the end of 2022, 1.6% at the end of 2023, and 2.1% at the end of 2024.

The Fed stated: “With inflation having exceeded 2 percent for some time, the committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment.”

This FOMC confab was particularly imperative because it came in the wake of the most recent U.S. consumer price index (CPI) reading, which showed inflation is stickier than the monetary doves predicted. The U.S. Bureau of Labor Statistics reported last Friday that the CPI surged by 6.8% in the year through November, the fastest pace in about 40 years.

A question of balance…

Even with the eventual reduction and end of quantitative easing (QE), monetary policy will remain accommodative well into next year.

Tapering does not equate to tightening credit conditions. The Fed tightens monetary policy by hiking short-term interest rates through policy changes to the discount rate, aka the federal funds rate.

Tapering reflects the gradual retreat from one aspect of dovish monetary policy (to wit, QE), whereas tightening signals the execution of contractionary monetary policy.

The Fed’s balance sheet of assets has mushroomed to enormous proportions. Now that the coronavirus crisis has significantly eased, it was inevitable that the Fed would start to wind down its asset purchases (see chart).

The Fed emphasized that tapering will precede any increase in short-term interest rates. What’s more, history shows that stocks hold up well during periods of central bank tapering.

The Fed operates under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.” It’s often referred to as the Fed’s “dual mandate.”

As Powell and his cohorts juggle their dual mandate, the Fed is pivoting toward fighting inflationary pressures over helping the labor market, at least for the time being. Many on Wall Street were getting worried that the Fed was complacent about inflation. Those worries have been put to rest.

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John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.