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.”