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The Fed Calms Rate Hike Worries

The Fed Calms Rate Hike Worries

| June 23, 2021
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The Federal Reserve Bank (Fed) has been doing all they can the past few days to calm the fears over last week’s hawkish Federal Open Market Committee (FOMC) meeting.

  • Fed Chair Jerome Powell testified to Congress that inflation is indeed transitory, and he isn’t considering hiking rates yet, until there is an actual inflation or imbalances.
  • New York Fed President Williams noted that the Fed’s goal is to improve employment first and foremost, then they will consider hiking rates. He also noted that there is still a long way to go to improving the employment backdrop.
  • Additionally, Fed members Loretta Mester and Mary Daly added to the dovish commentary.
  • The Fed is sticking to what it has been saying for months now and the bottom line is the Fed is still a tailwind for risk assets when they are this accommodative.

Daily Insights

U.S. equities open flat as markets attempt to set more record highs

  • The Nasdaq Composite, which reached its 15th all-time high of 2021 Tuesday, is up again as growth stocks continue their recent strength.
  • European markets are mostly lower, even though the Eurozone Purchasing Managers’ Index (PMI) showed its fastest growth in 15 years.
  • Asian equities ended their sessions mixed with the Hong Kong (Hang Seng) market finishing 1.8% higher, while Japan’s factory activity expands at its slowest pace in four months.

View enlarged chart.

About that first hike

Although the first rate hike likely isn’t for another two years, that doesn’t mean it isn’t all market participants have worried about the past week. But should we be so worried?

  • The Fed dot plot revealed the Fed now sees two rate hikes in 2023, versus the one that was anticipated.
  • Should investors fear that first rate hike? History would say no, as the first rate hike tends to happen early in an economic cycle and there is likely plenty of growth to come.
  • As the table below shows, moderate equity strength a year after the first hike is perfectly normal.

View enlarged chart.

Technical update

The Nasdaq closed at new highs, boosted by leadership from growth sectors consumer discretionary, technology and communication services.

Inflation And What the Fed Is Saying

Inflation seems to be on the rise, but LPL Research believes there are good reasons to think it will be transitory. Learn more in this week’s Weekly Market Commentary, available on the Resource Center, Marketing on Demand, and Broadridge.

What Does The Fed Say?

On this week’s LPL Market Signals podcast, LPL Research discusses why a more hawkish Federal Reserve shouldn’t have been much of a surprise, the sharp earnings revisions higher, and reasons for downgraded technology.

 

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