Fed lifts economic outlook but no policy change in sight
The Fed did not change its policy rate or bond purchase plan at its March FOMC meeting. Its economic growth forecast was much improved for 2021 and its unemployment forecast lowered. It also lifted its inflation forecast for 2021, but importantly sees little change in 2022 and 2023 inflation. The temporary nature of the higher inflation also means that Fed members foresee unchanged rates through 2023. Fed Chair Jerome Powell suggested the first rate hike is “far into the future”. Although bond yields are up slightly, the Fed’s message should provide comfort to equities and our ‘Reopening America’ theme.
- At its March meeting the Federal Open Market Committee (FOMC) made no change in policy, but did alter its outlook on growth and inflation. The Fed funds rate remains in the 0.0% to 0.25% range and should stay there through 2023.
- Significantly, the Fed increased its growth forecast for 2021 by more than 2% to properly incorporate the stimulus packages from the both the Trump and Biden administrations.
- The Fed’s accommodative policies stand in sharp contrast to some market fears that the economy is growing excessively fast and the risk of inflation has become so elevated in both the short and long term as to continue to foster a reflation trade. From the Fed’s perspective, the risks of inflation are temporary due to base effects and supply constraints, both of which should be resolved in the next few months.
- Based on the Fed’s outlook, its accommodative monetary policy stance, and the generous fiscal stimulus put in place in the past few months, we remain overweight on US and global equities as growth and profitability should be better than most suspect.
- From a sector perspective we focus on cyclical sectors such as financials, housing, autos, and even technology. Let’s not lose sight of the fact that we are at the beginning of a multi-year secular technology revolution that should create jobs, lift productivity and profitability and keep a lid on inflation.
- For Fixed Income investors we continue to expect rate volatility in the next few months as inflation readings may continue to rise in the short term. However, given the move we have already seen in the market’s inflation expectations, we still think there is limited upside to bond yields. We focus on carry opportunities in Fixed Income and look to selective opportunities in the Investment Grade and High-Yield credit markets.
- Overnight, equities rebounded, with cyclicals such as industrials and materials outperforming. Gold also welcomed the Fed meeting outcome.