A New Era at the Federal Reserve has Arrived

Mar 19, 2021 | Nick Scholte


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Marking a sea change in Fed-think, the U.S. Federal Reserve will now wait to see evidence of inflation before raising interest rates, rather than raising rates merely in anticipation of same. This should support equity markets.

To my clients:

It was a predominantly down week for North American stock markets with the Canadian TSX finishing essentially flat at "up" 0.01% (note the extra 0); the U.S. Dow Jones Index finishing down 0.5%; and the U.S. S&P 500 finishing down 0.8%.


A few quick hit points this week:

- The decline in Covid cases remains stalled in the U.S., while there has been a tick up in Canada over the past week. The U.S.’s successful vaccine rollout to date is likely being offset by more transmissible variants and relaxed social distancing behavior. This is the natural ebb and flow of human behavior I wrote about several weeks ago. However, the greater trend remains inexorably toward the better.

- Surprising absolutely no one, the U.S. Federal Reserve held rates steady at near zero this week. The bigger story pertains to Fed Chairman Jerome Powell’s forceful assertion that rates will remain on hold at such levels until at least 2023, and even more importantly, that the Fed will not raise rates until it sees evidence of inflation sustaining above its long-term 2.0% target rather than, as in the past, raising rates in anticipation of same. This is a sea change in “Fed-think” and it should be supportive of equity markets moving forward.

- In the near-term, markets still appear to be coming to grips with higher long-term bond yields. While the higher long-term yields may be hinting at looming inflation, it’s important to remember that inflation expectations are also indicative of economic growth. Further, the Fed messaging appears to be on point because short-term bond yields remain anchored at low levels and this likely indicates that the market both accepts and believes that Fed will NOT raise short-term interest rates any time soon.

- Overall, expectations for second half U.S. growth remain very high. For example, PIMCO, the world’s largest bond manager, believes second half growth could be pushing 10%.

That’s it for this week. All the best and remain safe,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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