Following the Fed’s last meeting, we published for our RIA PRO subscribers a simple question:
“What does the Fed know?”
Of course, this meeting followed the stock market plunge at the end of 2018 where their tone that turned from “hawkish” to “dovish” in the span of just a few weeks. Seemingly, despite the previous commentary about concerns over rising inflationary pressures, it was pressure from Wall Street and the White House that quickly “realigned” the Fed’s views.
- The Fed will be “patient” with future rate hikes, meaning they are now likely on hold as opposed to their forecasts which still call for two to three more rate hikes this year.
- The pace of QT or balance sheet reduction will not be on “autopilot” but instead driven by the current economic situation and tone of the financial markets.
- QE is a tool that WILL BE employed when rate reductions are not enough to stimulate growth and calm jittery financial markets.
This change in stance, not surprisingly, buoyed the stock market as the proverbial “Fed Put” was back in place.
But the change view may have also just trapped the Fed in their own “data dependent” decision-making process.
The Fed Should Be Hiking Rates
As we noted in our RIA Pro article:
“During the press conference, the Chairman was asked what has transpired since the last meeting on December 19, 2019, to warrant such an abrupt change in policy given that he recently stated that policy was accommodative, and the economy did not require such policy anymore.
In response, Powell stated:
‘We think our policy stance is appropriate right now. We do. We also know that our policy rate is now in the range of the committee’s estimates of neutral.'”