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Profit from the Pros By Kevin Matras Executive Vice President
Fed Leaves Rates Unchanged, Sees Higher Inflation, But Temporary
Stocks closed lower yesterday, but well off the lows, after a wild day following the FOMC Meeting Announcement and Fed Chair Press Conference.
As expected, the Fed left rates unchanged, with Fed Chair Jerome Powell saying it was 'highly premature' to begin discussing higher interest rates.
Although, with the majority of Fed officials now believing we could see at least two rate hikes by the end of 2023, it seems like the 'foreseeable future' just got a bit shorter in comparison to previous sentiments that the Fed would leave rates unchanged thru 2023. But that still implies no change in rates for the rest of this year, no change in rates next year, and likely no change in rates for much of 2023. That's a highly accommodative stance and is bullish for both the economy and the market.
Last time out, they said they weren't even ready to begin 'talking about talking about' tapering bond purchases.
That position has changed a bit too in that they have finally begun talking about talking about it. But that's all. They will monitor the data, and in future meetings, start discussing a plan for how and when to taper their bond buying, saying they will give plenty of advance notice before that happens.
That's leading people to believe that we could either begin seeing the Fed start to taper by or in Q4, or at least make an announcement of such by that time.
In the meantime, they said they will continue to buy $80B a month in Treasuries, and $40B a month in mortgage-backed securities.
They raised the growth outlook from 6.5% to 7.0% for this year. And they have it at 3.3% next year and 2.4% in 2023.
They also raised their inflation forecast from 2.4% to 3.4% for this year, and pegging it at 2.1% next year, and 2.1% again in 2023. Their position being that while inflation right now is a bit hotter than expected, they still believe that it will be transitory because they attribute a lot of the inflation readings to be by-products of supply disruptions and bottlenecks due to COVID. And as those bottlenecks ease, inflation should moderate along with it.
Interestingly, this was the sentiment of top money managers earlier this week when a Bank of America Global Fund Manager Survey showed that 72% of respondents believe that inflation will indeed be transitory, and that it?s largely due to the supply chain disruptions brought about by COVID, and that it will fall once these disruptions ease.
So my takeaway from yesterday remains largely the same as it was the day before: 1) The economy is booming. 2) Inflation is rising, but is transitory. 3) Rates will stay near zero for quite some time.
And that's all bullish news.
One thing that keeps getting lost in all of this inflation talk is growth. The economy is roaring, and is only expected to get stronger as the country fully reopens.
People also need to realize that stocks typically perform well in inflationary environments.
It's not inflation per se' that tanks economies, it's high interest rates. So even when they do begin to raise rates, let's say in late 2023, they are essentially starting from zero. And it should be noted that over the last 50 years, there's never been a recession (aside from last year's pandemic-induced plunge), when the Fed Funds rate was under 4%.
So I see an unfettered path for the economy to soar and stocks to soar along with it.
To read all about why I believe this year is going to be nothing short of historic, be sure to read my latest commentary...
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