The Fed last week basically told us what most of us suspected.
First, the Fed was optimistic about economic growth, while anticipating higher inflation, while stressing that COVID is still a risk.
The Fed will continue to purchase $120B of assets each month until, and I quote, “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. At the same time, is has not given the market when tapering will begin.
The Fed is also insisting higher inflation is transitory and is mostly due to supply chain “bottlenecks”.
Finally, the Fed shed some light on when it might raise interest rates or takeoff. This expectation is now set towards the end of 2023.
Overall, the bond market does not seem to worry about inflation, siding with the Central Bank. Please note it now seems yields peeked several months ago.
Also note that even assuming rates do rise towards the end of 2023, that is a very long way in the future to be able to position any portfolio. However, it might be a headwind.
The dollar initially rallied, but it has since given back most of its gains. As a sidenote, I personally do not consider the Fed statements dollar positive.
Overall, the Fed is still very accommodative, and does not want to surprise markets, giving a heads up of its intention’s way in advance. This is very market positive, because it provides participants time to digest and price everything in advance.
The bottom line is that the Fed continues to be supportive of both the economy and markets, but please note that now we have two headwinds. First at some point the markets will be concerned about interest rates if they rise, and second, inflation concerns are on everyone’s mind. If we add to these the valuation landscape, investors need to be extra cautious looking ahead.