The Fed Just Answered All the Market’s Questions, Except One
Yesterday’s official U.S. Federal Reserve “statement” on the economy, unemployment, inflation, and interest rates was simple, straightforward and unsurprising – in short, just what the markets needed.
The few upgraded projections in the central bank’s commentary – which might have scared investors – were tempered with coddling commentary about staying-the-low-interest-rate course until the Fed’s dual mandates are met.
And if that wasn’t clear and comforting enough, Fed Chairman Jerome Powell in his follow-up press conference, handled some tough questions with temperate answers, assuaging our fears with a tacit promise that no surprises would jump out anytime soon.
The one exception: Powell wouldn’t bite when asked what the Fed was planning for the so-called “supplemental leverage ratio,” or SLR, and an exemption whose expiration in two weeks could force big banks to dump billions of dollars’ worth of U.S. Treasuries they got to load up on during the year-long pandemic.
All Chairman Powell would say was that the Fed would “announce something in coming days.”
Here’s the long and short of yesterday’s statement and Powell’s comments, what they mean to market participants, and how you can position yourself to profit from what’s coming next.
Fed Claims Blue Skies Are Ahead and the Market Rallies
Markets – especially the stock-and-bond markets – were laser-focused on yesterday’s Fed action. They got the handholding they were seeking – and the promise that central bankers would keep interest rates lower for longer.
The Fed upgraded an important projection that GDP growth was expected to be 6.1% this year – a boost from December’s expectation of 4.2% growth for 2021.
Unemployment projections were lowered to an expected annual UE rate of 4.5%, down from the 5% unemployment rate projected in December.
Inflation expectations were ratcheted up to 2.2% by year-end 2021, up from 2020’s actual 1.5% increase.
The upgraded metrics, faster-than-expected economic growth, lower unemployment and rising inflation would typically presage a Fed need to at least start “tapering” bond purchases – and ultimate need to eventually raise rates.
That’s not going to happen, at least as long as the Fed has the power to keep rates low.
Policymakers said faster economic growth will subside, unemployment isn’t low enough (and won’t be for some time), and inflation’s not a problem because it’s probably transitory – and if it isn’t, Fed members would be happy to see it run a lot higher to average 2% for several years.
That kind of talk is “risk on” fodder, for sure.
Fed Chairman Powell also answered a question about whether the central bank would “twist” its monthly Treasury purchases to tamp down longer-dated maturities if they started rising, stating that they “would be concerned about disorderly conditions.”
Translation: The Fed will twist as hard as it has to to maintain orderly markets, or gently rising rates – and at a pace it dictates.
That’s all pretty good stuff.
Markets rallied, with a noticeable jump in particular when Powell said Fed members would signal “well in advance” any intention to even think about tapering. That’s a giant “risk-on” green light.
As for Powell not answering the question on SLR and the expiring exemption: I believe that’s all about giving banks the chance to unload their positions before the Fed grants whatever further exemption financial institutions need.
To put it more bluntly, the announcement in coming days will be more red meat for bullish investors.
So how do you play this historic Fed market backstopping music?
Just dance, dance, dance.
And I like buying the cyclicals, the airlines, the hotels, and the consumer-discretionary stocks that have already been on a furious upswing.
Thanks to the Fed’s artful answers, all these stocks have lots more room to run.
Warm wishes for health, wealth, and happiness,