Weekly Market Update 06/28/2021
The Federal Reserve is getting into position to move the goal posts. True, it doesn’t plan to shift them dramatically, but it does seem likely to do so modestly and earlier than previously thought. Heretofore, it was expected the Fed would eventually reduce its vast bond purchases. Now, Fed Chair Jerome Powell suggests the central bank may start tapering its purchases of Treasury securities very soon. It also said at its recent FOMC meeting that policymakers expect to raise interest rates twice by the end of 2023. That, too, is earlier than projected. Indeed, the St. Louis Fed President has said the first rate hike may come by late 2022.
Such positioning reflects the central bank’s more upbeat economic outlook. Underpinning this revised thinking is the general strength in housing and industrial output, the sharp decline of COVID-19 cases, and a healing of the labor market. In all, the FOMC, which had been looking for 2021 GDP growth of 4.2% as recently as December, has lifted its growth target to 7.0%. The flip side is that this stronger showing is bringing higher inflation. Meanwhile,
The Fed’s more hawkish stance has caught the eye of Wall Street, and not in a positive way, as stocks initially backed off from their June highs. It seemed investors were uncomfortable with the thought of higher borrowing costs, even if such increases figure to be incremental.
Is the Federal Reserve overreacting? Most likely it isn’t. First, little of a tangible nature may change on the interest-rate front for a while, as the first adjustments could still be 18 months off and then come only if the rise in inflation proves more than transitory (the current Fed position).
After the mid-June pause, the stock market’s resilience may well have resumed. Our view is based on the fact the recent decline in Treasury yields suggests investors still buy the Fed’s thesis that any rise in inflation will be short-lived and will fade as the business expansion settles down.
Conclusion: We think the best course for investors is to hold their ground and accept the equity market’s short-term vagaries so long as the fundamentals remain sound.