A Modest Shift in Expectations by the Fed; No Shift in My Market Outlook

Jun 18, 2021 | Nick Scholte


While pushed forward, the median expectation of Fed members' nonetheless remains that rate hikes are two years away. At the same time, the Fed's 2021 GDP growth forecast was raised to 7.0%. The outlook remains bright.

To my clients:

It was a down week for North American stock markets with the Canadian TSX falling 0.7%; the U.S. Dow Jones Index down 3.5%; and the U.S. S&P 500 down 1.9%.

The market driving news of the week was the U.S. Federal Reserve’s policy announcement and accompanying press conference on Wednesday. Specifically, it was the adjustment to some Fed members’ interest rate expectations that captured the most attention. As revealed in the Fed’s so-called “dot plot”, the new median expectation of Fed officials is for two interest rate increases by the end of 2023 – one year earlier than the previous median expectation. The adjustment to median interest rate expectations occurs simultaneously to the Fed also raising its 2021 GDP growth forecast to 7.0%. So in essence, the Fed is suggesting that a strong recovery is playing out and this may well justify raising rates somewhat sooner than previously expected. It is here that I have a number of personal observations:

1) Chairman Powel took pains to make clear that the dot-plot is NOT official Fed policy. It’s merely an attempt by the Fed to provide transparency to the markets on individual members’ thinking.

2) Nevertheless, the dot-plot illustrates a shifting mindset of policy makers.

3) It is important to note that the median expectation for an increase in rates remains 2-years away

4)It is also important to note that a 7.0% GDP growth rate forecast for 2021 is more than twice the average rate of growth since the end of World War 2

5) The Fed continues to believe that the current surge in year-over-year inflation will be temporary (although Chairman Powell did acknowledge that the Fed will listen to the data and its current expectation may prove incorrect)

6) The main motivator for the Fed to raise rates some two years out is not to temper inflation (see #5 above) but to provide a policy cushion so that there is room to lower rates whenever the next crisis and/or recession arises. More simple stated: ultimately, the Fed wants to “normalize” policy.

Bottom line – while there may be reason for certain, shorter-term market participants to react as they did this week (i.e. push markets lower), the longer-term outlook remains very strong and, in my opinion, equities should continue to be over-weighted. The market’s weakness the past five days is one of countless such episodes that occur during each and every long-term “bull market”.

Lastly, the foreshadowed (written about in my weekly update 4 weeks ago) reduction in gold bullion in client portfolios occurred this week. As a reminder, bullion was added during the crisis in 2020 as a portfolio hedge against, frankly, the unknown. The position largely served its purpose. The original ~5% position was reduced to ~3% earlier this year and, in turn, this 3% position was reduced to 1% this week. With the proceeds, a new 2.5% position in Restaurant Brands International was added. As is consistent with my investment management preferences, the company pays a solid 3.2% dividend and has a favourable growth outlook per RBC Capital Markets. The final ~ 1% position in gold bullion will likely be maintained as a final token hedge against the possibility of inflation.

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


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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