
Stocks initially surged after the Fed released its post-meeting statement and its latest economic forecast, showing it will keep interest rates at zero at least through 2023, as expected. Stocks gave up their gains as Fed Chairman Jerome Powell briefed the media, and described the Fed’s guidance as strong and “powerful.”
“He’s the great and powerful Oz. Investors got duped. They thought enhanced forward guidance meant something, but when they peeked behind the curtain they realized the Fed didn’t do anything, and the market rolled over,” said Michael Arone, chief investment strategist at State Street Global Advisors.
Treasury yields moved slightly higher after Powell said the Fed plans to keep its asset purchases at current levels for now. Some bond market pros have been expecting the Fed to increase Treasury purchases, and Powell did not commit to that. The 10-year Treasury yield rose to 0.695%.
“We’re going to continue to monitor developments, and we’re prepared to adjust our plans as appropriate,” Powell said.
But it was the Fed’s guidance that markets found dovish. In the Fed’s latest projections, core inflation is expected to stay low and not reach the Fed’s 2% target until 2023. At the same time, the job market is expected to improve to the point where unemployment is at 4% in 2023, below the longer run rate of 4.1%.
“This is dovish – lower rates for longer, higher equities, weaker dollar,” said Jon Hill, senior fixed income strategist at BMO. “The Fed is saying we’re not hiking in 2023, maybe in 2024 … What they’re saying is these are our goals. We expect to have just barely met them and even then, they’re not raising rates.”
Powell said the Fed expects inflation to ultimately improve.
“That’s very strong forward guidance, and we think that will be durable guidance that will provide significant support for the economy,” he said.
While some Wall Street strategists and investors believe inflation could become a problem, the Fed has said it is more concerned about disinflation.
Credit: CNBC