“It is amazing how people often look at the same picture and see different things“– Paul Ebeling
It’s also interesting how market analysts and participants can hear the same thing but have an entirely different take on what was heard. That captures the essence of the disparate reactions by the stock and US Treasury markets to the latest FOMC decision and press conference.
These markets are seemingly aligned in the wake of those happenings, but subsequent behavior suggests things may not be so.
What stood out for me and many other analysts and market participants were the summary projections for the economy and the target range for the fed funds rate, 1 changed considerably while the other did not change.
The Summary of Economic Projections for Y 2021 showed an upward tilt to the median estimate for the change in real GDP to 6.5% from 4.2%, a downward tilt in the median estimate for the unemployment rate to 4.5% from 5.0%, and an upward tilt in the median estimate for the PCE inflation rate to 2.4% from 1.8%.
What did not change was the median estimate for the target range for the fed funds rate. That target range is expected to remain 0.00-0.25% through Y 2023.
Plus, Fed Chairman Powell did not change his Dovish commentary when you really look at it. He said the following:
- Inflation rates will be picking up noticeably in coming months given low base effects, but any move above 2.0% is expected to be transient.
- I would be concerned by disorderly conditions in markets or by a persistent tightening of financial conditions that threaten the achievement of goals, but the stance of monetary policy we have today is appropriate.
- We think that our asset purchases, in their current form, are the right approach. We could change them in a number of different dimensions should we deem it appropriate, but for now we think our policy stance is appropriate.
- It is not yet time to start talking about tapering asset purchases.
In brief, he said again that the fed funds rate is not going up anytime soon and that the Fed is unlikely to be swayed by any scary-looking inflation data that could present itself in coming months.
In brief, what the stock market heard right after the FOMC decisions and press conference was: “Party on!” In brief, what the US Treasury market heard was: “No need to worry about a taper.”
We believe that the move is setting up to be an interesting test, not only for the US Treasury market and the stock market, but for the Fed too.
The coming months are likely going to produce some scary-looking inflation data. Chairman Powell suggested as much, citing base effects that play into inflation calculations, i.e., prices this yr will be comping against much lower prices seen in the depth of the VirusCasedemic chaos onset. In other words, the inflation data is going to look quite inflationary, but the Fed’s view is that the scary stuff will only be temporary.
Meanwhile, stay tuned and always take what the markets give.
Have a healthy day, Keep the Faith!