The Dow Jones industrial average and the Nasdaq are up more than 13 percent since Election Day, with the Dow boasting 12 record closing highs in a row.
With talk of tax cuts, GDP in the 3 percent range going forward, huge infrastructure projects and looser regulations, it’s a party on Wall Street. Federal Reserve Chair Janet Yellen sees that party continuing and may be looking to raise interest rates sooner rather than later as the economy — and presumably inflation — expands.
Here’s the gist of the Fed’s meeting notes from Feb. 22:
“The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.”
Couple the huge stock market gains with uncertainties surrounding President Donald Trump’s economic agenda, (i.e., does he have the votes for an infrastructure stimulus package, new trade deals and lower taxes?), and the Federal Reserve has a lot on its plate heading into spring.
[See: 8 Ways President Donald Trump Will Affect Wall Street.]
“While the minutes don’t mention specific policies (or even the president and Congress) by name, the reference to ‘more expansionary fiscal policy’ is a nod to President Trump’s hopes to give economic growth a substantial lift,” says Mark Hamrick, Bankrate.com’s senior economic analyst. “If successful, that could translate to a steeper trajectory of rate hikes down the road, probably not before 2018.”
While Trump and a bullish U.S. stock market are clearly setting the pace, economically, the Federal Reserve wants to remind market watchers that it has an agenda of its own, even if it’s a modest one, rate-wise.
“The Federal Reserve, via Janet Yellen, are clearly signaling to markets that they are concerned not to repeat past mistakes of waiting too long to raise rates, and that a rate increase could therefore come any time at any future meeting,” says Zachary Karabell, head of global Strategies at Envestnet. “That said, they are also signaling that ‘normal’ rates today will be quite low compared to normal in the 20th century and that even an aggressive series of moves will leave short-term rates at a modest 2 percent at most.”
It’s not exactly a huge surprise that financial industry insiders see the Fed’s impact on the stock market as limited — but that’s a positive development. “The Fed minutes had very little impact on equity markets,” says John Culbertson, president and chief investment officer of Context Asset Management. “Volatility has been very low since the U.S. election, and the Fed’s very steady approach has contributed to this scenario.”
[See: 10 Long-Term Investing Strategies That Work.]
Right now, it’s slow and steady that wins the economic race, a landscape that should gladden the hearts of market mavens. “Various Federal Reserve governors have said in public statements that their expectations are for two to three rate increases in 2017,” Culbertson says. “These statements set the stage for slow and gradual rate increases as employment data confirms a steady but aging U.S. expansion. In my view, the Fed is going to great lengths to not surprise the market as they enter the point of inflection with rate increases as inflation slowly picks up.”
U.S. financial markets seem to be absorbing a measured interest-rate policy trend by the Federal Reserve quite handily.
“The Fed’s strategy to pursue a ‘gradual pace’ of removing accommodation seems to be confirmed by the stock and bond markets,” says Aaron Jackson, professor of economics at Bentley University and chairman of the Boston Fed Challenge Leadership Council. Jackson notes the 10-year treasury dropped about four basis points following the release of the minutes and moved a bit lower in the following days.
“Thus, we see bond markets pricing in a slower adjustment in interest rates than some had suggested, prior to the minutes’ release,” he says. “The six-month treasury, which tends to project near-term rate rises, has moved a little lower as well. Equities markets, as a result, continued their steady move up.”
Going forward, inflation and jobs will continue to be in focus for the next several months and should dictate whether or not the Fed increases rates, some Wall Street experts say. “These issues will continue to be impactors on the trajectory and pace of future rate hikes,” says Mason Williams, chief investment officer at Coral Gables Trust. “Unemployment data will hold clues as to the health of the labor market, which usually filters down to inflationary pressures via wage hikes. Any readings that exceed expectations could result in a faster response via rate hikes.”
[See: 7 Dividend Stocks to Benefit From Trump Tax Changes.]
With a zig-zagging blend of uncertainty and optimism on the financial markets and the U.S. economy in the age of Trump, Wall Street gurus see higher rates and higher market returns going forward. It will be up to Yellen to sort everything out and keep the economy in check in a calm, steady, measured way — and investors seem to be generally OK with that.
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Janet Yellen and the Fed Are in the Spotlight as Stocks Soar originally appeared on usnews.com
