Actually, here’s one more comment from Unigestion’s Cross Asset Solutions team.
They say investors found what they needed in this FOMC meeting: improvement in fundamentals and no early signs of tapering in liquidity injections.
The Fed has made it clear that it sees the improvement that all investors are seeing and responding to. However, no mention has been made of the danger of rising rates or uncontrolled inflation. The rise in inflation is “transient”, that in our view is the keyword of this meeting. As long as the Fed does not see a longer-lasting growth acceleration, it will not believe in a longer-lasting inflation wave. When asked about a potential tapering, the answer was clear: “not now”. Goldilocks here we come.
This is visible in the market reaction tonight – with stocks up to record highs on Wall Street, and the dollar down.
Markets have been served with better growth, controlled inflation expectations and no changes to accommodation for the foreseeable future. The initial reaction weighed on the US dollar, pushed equities 1% higher than their intraday lows while yields on 10-year Treasuries were a touch softer.
The S&P 500 is back to historical highs of 3960, 10-year yields are at 1.66% after reaching 1.685% earlier in the day (their highest level since February last year) while inflation breakevens continued to creep higher around the 2.3% level.
Fed meeting: what the experts say
And finally… here’s a round-up of expert reaction to the Fed meeting.
Anna Stupnytska, global economist at Fidelity International, says the Federal Reserve sent a dovish message today (helping to push Wall Street to those fresh highs).
The combination of incredibly easy financial conditions, which hardly tightened over the past few weeks, accelerating vaccination campaign, another substantial fiscal package recently legislated and re-opening prospects on the horizon is certainly boosting Fed’s tolerance to higher yields.
“While inflation and growth forecasts were revised up over the forecasting horizon, the median dot remained unchanged, suggesting no hikes through 2023. This sends a dovish message, revealing that the Fed is serious about pursuing its new FAIT [flexible average inflation targeting] framework.”
Michael Pearce of Capital Economics believes the FAIT framework could allow rates to stay on hold for the next few years:
The updated economic projections released after the Fed’s mid-March meeting show that officials expect strong economic growth this year to have only a transitory impact on inflation, which explains why most still aren’t thinking about thinking raising interest rates.
Even if inflation proves more stubborn, we expect their new framework will allow them to justify leaving rates unchanged over the next few years.
Paul O’Connor, Head of Multi-Asset at Janus Henderson, says Jerome Powell has deferred some tougher decisions, notably about tapering.
As widely expected, the Fed’s new growth forecasts were a major uplift to December’s stale predictions, reflecting recent improvements in US macro momentum, the new administration’s fiscal stimulus and vaccine-boosted reopening trends. Real GDP forecasts of 6.5%, 3.3% and 2.2% for 2021, 2022 and 2023 and Core PCE forecasts of at 2.2%, 2.0% and 2.1% were typically quite close to consensus expectations.
What was most interesting here was that, despite these forecasts and the Fed’s projected decline in the unemployment rate from over 6% today to 3.5% in 2023, the consensus view from Fed governors is that they expect to keep interest rates on hold throughout 2023. While bond markets can take comfort from the Fed delivering on its promise to go slowly with rate hikes, despite inflation creeping above the 2% target, the monetary tide is nevertheless turning. Whereas, back in December, only five of 18 Fed officials predicted higher rates in 2023, seven now expect a rate hike in that year and a third of the committee expects that more than one will be needed. Four participants now project hikes for 2022, compared to just one in December.
The Fed delivered a fairly dovish message to the markets today, but the big debates have been deferred not decided. While it is not hard for the Fed to remain patient, while projecting inflation bouncing around target over the forecast horizon, the pressure to tighten policy is likely to intensify if the US recovery accelerates into the summer, as everyone expects. Many of the questions that have been avoided today will linger over the months ahead and may well have become more urgent by the June FOMC. By then, the Fed might be prepared to take the first decisive step away from the current super-accommodative monetary stance by indicating when it will start to taper QE. If macro momentum continues to build, it might also be confirming market expectations of rate hikes in 2023 at that meeting. The June FOMC could be a more challenging meeting for Chairman Powell than today’s turned out to be.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, reckons we could see more volatility this year:
“Chair Powell had to walk a tightrope in the press conference, balancing a rosier outlook against the Fed’s commitment to let the economy run hot. The recent swings in Treasury yields highlight that investors are still not fully comfortable with numerous aspects of the Fed’s new target – what exactly their tolerance is for higher inflation, what inclusive full employment looks like in practice and how close to these goals the Fed needs to be before it begins to remove accommodation.
“As growth picks up sharply in the coming months, all of these uncertainties point to the potential for ongoing volatility in bond markets. This may create periodic bouts of instability in risk assets but overall we expect the vaccines, stimulus cheques and consumers looking to make up for lost time to translate into strong corporate earnings in the second half of the year, which should propel stock markets higher by year end.”
Dow & S&P 500 close at record highs
Both the Dow and the S&P 500 have both closed at record highs, in fact, as worries about US interest rate hikes are soothed by the Fed.
Wall Street closes higher thanks to dovish Fed
Stocks have closed higher on Wall Street, as concerns that the Fed was moving towards an earlier interest rate hike faded.
The Dow Jones industrial average has closed 189 points higher at 33,015, a gain of 0.6% today, as traders welcomed the upgraded growth forecasts.
The broader S&P 500 index shrugged off its earlier losses too, to end the day up 0.3% at 3,974 points, up 11.41 points.
The Nasdaq also bounced, as US bond yields fell back, with the tech index closing 53 points higher at 13,525, up 0.4% (having been down 1% before the Fed statement hit the wires.)
The US dollar has fallen, after the Fed raised its growth forecasts and pushed back against suggestions that it could taper its bond-buying programme soon.
This has pushed sterling up by eight-tenths of a cent, to $1.396.
The euro is up a similar amount, to $1.198.
Q: Are the supply chain bottlenecks getting better, or worse?
Jerome Powell saying it’s impossible to say for sure.
But with stimulus checks being sent out, and Covid cases coming down, the really strong economic data is coming, and that’s when you’ll see where the bottlenecks are.
But firms will be reluctant to raise prices, he predicts, as he wraps up the press conference.
Powell: Expect bottlenecks and one-time bulge in prices
Q: Households are sitting on a lot of excess savings. How much will that affect inflation, and will it be transitory?
Powell says the Fed is looking at how people will spend when the economy reopens, and used very conservative, mainstream assumptions.
There is very likely to be a step-up of inflation in March and April, when last year’s low numbers drop out of the 12-month window. That ‘fairly significant pop’ will wear off quickly, though.
Past that, as the economy reopens, people will spend more – in restaurants, theatres, and on travel. As Powell puts it:
You can only go out to dinner once per night, but a lot of people can go out to dinner.
There will also be bottlenecks – firms won’t be able to service all the demand.
That will lead to a relatively modest increase in inflation, Powell predicts – a “one-time bulge in prices”, but it won’t change inflation going forward.
Jerome Powell does not sound concerned that achieving high employment could trigger a surge of inflation.
There was a time when there was a tight connection between unemployment and inflation, he says. That time is long gone, Powell insists [a nod to the demise of the Phillips Curve].
He points out that the US had a strong labour market before the pandemic, without having troubling inflation.
There is a link between wage inflation and unemployment, Powell continues. But, when wages move up because unemployment is low, firms have been absorbing it into their margins rather than raising prices.
We think we have freedom to seek to achieve high levels of employment without worrying too much about inflation, Powell insists firmly.
Here’s the key message from a chuckling Jerome Powell today – it’s not time to start talking about talking about tapering the Fed’s stimulus programme.
Jerome Powell is spending a lot of his press conference batting away questions about when the Fed might tighten policy.
His main point is that economic uncertainty is still high, so ‘liftoff’ will depend on outcomes which are currently highly uncertain.
Powell: I’d love to see faster European growth and smoother vaccine rollout
Q: Given the problems in Europe’s economy, could the eurozone drag the US recovery down?
Fed chair Jerome Powell agrees that the US and European recoveries are diverging, as happened after the financial crisis. As before, the US is leading the global recovery. He points out that the Fed’s mandate is domestic – maximum employment and price stability – but it does monitor developments abroad. Very strong US demand, as the economy improves, is going to support global activity as well, he predicts, as it should mean the US imports more from abroad.
And Powell adds:
I’d love to see Europe growing faster. I’d love to see the vaccine rollout going more smoothly.
But he’s not worried about the impact on the US economy. The US is on a very good track, Powell continues, with very strong fiscal support coming, vaccinations going quickly, and cases coming down.
I think we’re in a good place.
Jerome Powell also cautions that it will take time for the labor market to recover from the pandemic.
Even with a rapid economic bounceback, there are 10 million people that need to get back to work, and it’s going to take some time for that to happen.
Powell points out that the US is still fighting the Covid-19 pandemic, and the path of the virus remains an important factor:
Here are the key points from the Fed today, via Bloomberg’s Francine Lacqua:
On the dot plots, Powell insists that a strong bulk of the FOMC committee don’t expect interest rates to increase during the current forecast period (before the end of 2023).
And he’s pushing back against focusing too much about when the first US rate hike might come – pointing out that the state of the US economy in two or three years is highly uncertain.
Powell also flagged that a ‘transitory’ rise in inflation over the Fed’s 2% target would not meet its standard to trigger a rate rise.
Q: Is it time to start ‘talking about talking about’ tapering the Fed’s bond-buying stimulus programme?
Jerome Powell plays down the suggestion.
We want to see actual progress towards our target of “substantial further progress” in maximum employment and price stability, Fed chair Powell explains, rather than simply forecasts.
When the data shows were are on track to achieve that substantial progress, we’ll say so, he adds.
Federal Reserve chair Jerome Powell is holding a press conference now.
He explains that indicators of US economic activity and employment have improved recently, but cautions that no-one should be complacent.
The recovery is uneven, and far from complete.
The Fed will continue to provide support for the US economy for as long as needed, Powell says, adding that ongoing vaccinations offer hope of a return to more normal conditions later this year.
Powell says the Fed’s growth forecasts have been “revised up notably since December” [to show 6.5% growth in 2021, up from 4.2% previously expected].
He says this reflects progress on vaccinations and fiscal policy (a nod to President Joe Biden’s $1.9trn stimulus package).