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Fed Keeps Rates Unchanged, Markets Sell the News

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Market participants got the news they had been waiting for today, but when the results hit they sold, sold, sold. Down 1% across all major indexes following the Fed announcement about Fed policy and Fed Chair Jay Powell’s press conference after, indexes buoyed back up a bit from those session lows: the Dow -0.77%, the S&P 500 -0.54%, Nasdaq -0.24% and the Russell 2000 -0.23%. No serious damage; run-of-the-mill “sell the news.”

The Fed, unsurprisingly, left interest rates changed near zero, while continuing to purchase $120 billion in assets. This means the Fed is not even bringing up the subject of tapering buybacks, as some may have been expecting. The Fed now sees 2% inflation as an actuality, but will allow it to run up hotter than 2% for the time being. Over the last 48 months, 26 of them have had inflation rates of sub-2%.

Seven voting members of the Federal Open Market Committee (FOMC) expect a rise in interest rates in 2022, while 13 look for art least one increase by the end of 2023. None expect rates to rise at all for the rest of 2021. Inflation forecasts are up 100 basis points to 3.4% for the current full year, with Gross Domestic Product (GDP) guided up to 7% from its previous 6.5%. The Fed sees the inflation clearly. And it is not frightened.

Of course, all these discussions are subject to change. That can only mean we’d keep out current monetary conditions in place longer; there’s no way to become more accommodative from the Fed’s current stance. But just the idea that rate hikes are on the distant radar was enough to take a bit of the speculative air out of the balloon. There may also be a reluctance to pay up for high-growth names now that our new Fed map is before us.

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