Home Uncategorized The Federal Reserve is keeping its foot on the gas for now;...

The Federal Reserve is keeping its foot on the gas for now; S&P 500 near record on Powell Talk

53
0

The Federal Reserve maintained its aggressive monetary policy on Wednesday, expecting “substantial further progress” on its targets for jobs and inflation. The S&P 500 briefly hit a record high when Fed Chairman Jerome Powell spoke, but closed slightly lower.




X



The Federal Reserve’s statement took a more upbeat tone, noting that “economic activity and employment have strengthened.” Even the sectors hardest hit by the pandemic “showed improvement.”

Chairman Powell balanced that positive talk with lingering challenges that could slow the Fed’s policy normalization. In addition to ongoing concerns about Covid, he noted the shift to automation caused by the pandemic, which could lead to the recovery of employment for some service workers. “IIt will be a different economy,” he said.

The Fed’s statement also noted that “inflation rose, mainly reflecting transitory factors.”

Powell clarified that inflationary pressures arising from supply bottlenecks “are likely to be temporary as they relate to the reopening process.”

The Fed chief once again acknowledged that some asset valuations are high: “Some asset prices are high. You see things in the capital markets that are a bit frothy. This is a fact.”


After hours: 10 profits moving next to purchases; Biden’s tax plans are on tap


S&P 500, Treasury yields react to the Federal Reserve

The S&P 500, which rallied early to a record high of 4,197 points stock market shares briefly eclipsed 4200 before weakening, as Powell said. But the S&P closed up 0.1%. Meanwhile, the Dow Jones fell 0.5%. The Nasdaq Composite Index fell 0.2%.

The yield on the 10-year Treasury rose 2 basis points to 1.64% ahead of the Federal Reserve’s statement, then eased back to 1.62% when Powell spoke.

Now Talk Timing?

The Fed reaffirmed its commitment to continue buying assets worth at least $120 billion a month until the US economy makes “substantial further progress.”

However, today’s Federal Reserve meeting was the last before speculation intensified about when the central bank’s asset purchases will begin to come to an end. After March’s jobs report showed a surprisingly strong gain of 916,000, Powell said he wanted to see a “string of months” with similarly strong reports before policymakers would even consider a very gradual unwinding of monetary easing.

On Wednesday, Powell said only that “string of months” meant more than one. This keeps the door open for discussion in June.

The final tapering decision will eliminate key support from ultra-low interest rates as well as historically high equity valuations for the S&P 500 and the broader market.

Rising Treasury yields will weigh on the S&P 500 in coming months due to President Joe Biden’s proposed corporate and capital gains tax hikes. However, this pressure is still taking shape. Moderate Democrats will have to sign off on any tax hike, and Fed Chairman Jerome Powell has already made it clear that today’s meeting will be a non-event.

Why the Federal Reserve’s next meeting will matter

With jobless claims falling to pandemic lows, it looks like Fed Chair Powell will have a streak of three strong months before the June 15-16 meeting. That could be enough for the Federal Reserve to begin signaling a tapering of asset purchases by early 2022. Even if it doesn’t, investors will be waiting for an announcement, which seems very likely to happen by July and almost certainly by September.

The June meeting will also bring the next quarterly economic forecasts. It will show whether Powell’s majority to keep the Federal Reserve’s benchmark interest rate pegged at zero until 2024 will fall further. In March, seven of the 18 members of the Fed’s policy committee signed on at least one rate hike in 2023. Four of these members have raised the Fed rate in 2022.

By July, year-on-year inflation will exceed last year’s three-month decline from March to May. Then Wall Street will begin to get a clearer picture of whether the rise in inflation in the near term will be only temporary, as the Fed predicts. This perspective is key to the Fed’s current stance that the first rate hike of the cycle is not expected until 2024.

The outlook for Biden’s spending and tax hikes should also become clearer this summer. The new spending will be more grassroots than a tax increase, and it will focus on those with the greatest propensity to spend. Both of these factors could add fuel to a red-hot economy in 2022.


Join IBD’s experts as they analyze active stocks in the stock market rally on IBD Live


Why interest rates matter to the S&P 500

As of Tuesday, prices in financial markets indicated that inflation would average 2.39% over the next decade. That’s the difference between Tuesday’s 1.62% 10-year Treasury yield and the -0.77% yield on 10-year inflation-protected securities, or TIPS.

Moody’s Analytics chief economist Mark Zandi wrote this week that negative inflation-adjusted Treasury yields likely “reflect the Fed’s trillions of dollars in purchases of Treasuries through its quantitative easing program.”

Concerns about Fed tapering should remain on the back burner for now, but strong economic growth suggests an eventual price revision. Zandi predicted the 10-year Treasury yield would rise to 2% this year, 2.5% in 2022 and 3% in 2023.

What could this mean for the S&P 500? Wall Street uses the 10-year Treasury yield as a risk-free rate to estimate future corporate cash flows. When that rate rises, the future cash flows promised by high-growth companies look less attractive.

UBS equity strategist Kate Parker finds that every 50 basis point rise in the 10-year Treasury yield lowers price-to-earnings multiples by six-tenths of a point. Based on the S&P 500’s current forward earnings multiple of about 22, this would equate to a drop in the S&P 500 of nearly 3%.

Please follow Jed Graham on Twitter @IBD_JGraham to cover financial markets and economic policy.

YOU MAY ALSO LIKE:

Catch the next big winning promotions with MarketSmith

Want to make quick profits and avoid big losses? Try SwingTrader

The best growth stocks to buy and view

IBD Digital: Unlock IBD’s premium stock lists, tools and analysis today



This article is first published on Source link

Previous articleJobless claims are rising again, a sign that the job market is cooling
Next articleMonarch butterflies move a step closer to extinction : NPR