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Profit from the Pros By Kevin Matras Executive Vice President
Stocks Closed Mixed, Fed Reaffirms Low Rates And Support For The Economy
Image: Bigstock
Stocks closed mixed yesterday after giving up early gains. The Dow was up slightly, but the S&P and Nasdaq were down. But interestingly, the small-cap Russell 2000 index, once again, led on the upside with a gain of 0.92%. And already for the week, they're up 3.80%.
Stocks were already in the green before the FOMC statement came out. Then shot up afterwards when they reiterated their pledge to keep interest rates low, and to allow for more inflation than they have in the past. Moreover, they reaffirmed their purchase of $120 billion a month in Treasuries and Mortgage-Backed Securities, they updated their guidance to project a smaller decline in the annual GDP, and a lower unemployment rate as well.
But those gains were short-lived. Some attributed the turnaround to hearing that they'll likely keep rates near zero for the next 3+ years (thru 2023).
Why that would spook the market though, makes no sense. Everybody knew/knows rates are going to remain low for the foreseeable future. Maybe some were concerned that their 3-year timeline suggested a weaker recovery. But I don't think so.
Chairman Powell, in his news conference, explained that while inflation remained stubbornly low (below their 2% target), they'd like to see inflation get to that level, and to remain at that level for a period of time. That means enacting monetary policy to stimulate inflation if it's persistently low, and allowing it to stay above 2% for a while in order to achieve an average of 2% that can stick.
He also went on to say that he knows many people understand intuitively that high inflation can be considered bad, but said that many people may not understand that low inflation is not ideal either, and that a certain amount of inflation is good. He then went on to elaborate that there's an "expectation of future inflation that's built into every interest rate." "To the extent that inflation gets lower and lower, interest rates get lower and lower, and then the Fed will have less room to cut rates to support the economy." That pretty much sums up why the Fed is so determined to get inflation up.
Anyway, it was an interesting news conference. And informative for those less familiar with the Fed's policy on rates and inflation.
I found it to be a positive for the economy and for stocks as they are firmly committed to supporting economic growth and ushering in full employment.
And I'm expecting more upside to come. Especially with calls for unprecedented growth for the remainder of the year and record growth next year.
As I've said before, these are historic times for the economy, and for the market.
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