The Fed Calms Rate Hike Worries

Posted on June 23, 2021 by Rick Fisher Jr.

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.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data are from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

For Public Use – Tracking # 1-05159215