The decisions from last week will likely spill haphazardly into the future; yet the extent of their consequences remain opaque and their potential damage, if any, hard to quantify.
Specifically, the US Federal Reserve last Wednesday made a number of important announcements.
The first point of note was concerning interest rates. Here, the Fed reigned in their expectations – if only a little – saying that they may now raise interest rates as early as 2023. In March, the Fed said 2024 was the earliest that it may raise rates.
Second, the Fed said that until its employment and price stability goals had been met, it would continue its quantitative easing program. On a monthly basis, the current intention is to buy up a minimum of $80 billion of treasury securities and a minimum of $40 billion of mortgage-backed securities.
The final and maybe most salient point made last week was concerning inflation. Here the Fed lifted their 2021 inflation expectations from 2.4% to 3.4%. Such projections however, the central bank assured the market, would be ‘transitory’, with the expectation for inflation to recede to 2.1% in 2020.
‘With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent,’ the Fed said in a statement.
We last touched upon inflation in May, following April’s blowout CPI release which saw consumer prices increase 4.2% year-on-year. Most of that was driven by an increase in used vehicle prices.
At the time we noted that investors sold-off growth stocks in response, though they nonetheless remained expensive, by historical standards.
Now, despite last week’s monetary policy shakeup, growth stocks didn’t face any significant selling pressure. In fact, on a relative basis, the Nasdaq – here being used as a proxy for growth – outperformed the S&P 500 last Wednesday, Thursday and Friday.
Tesla – the poster child for growth-at-all-costs even finished out the week higher!
Will that pattern continue? Hard to say. But the market reaction seems peculiar at first glance. It’s generally conceived that rising interest rates and inflation are ‘bad’ for growth stocks. So, whether or not these stocks will be able to maintain their relative strength in the week(s) and months ahead will likely be the new hot topic of discussion for the market.
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