In a time when the mundane face mask is a fealty test to Trump, the experience of the Federal Reserve has been interesting. Like all real estate developers, Trump argued for lower interest rates (think: construction costs) and lambasted Jerry Powell, Chairman of the Federal Reserve. Fighting to maintain some tiny piece of the Fed’s traditional independence, Powell raised rates late in 2018, creating a “December to Remember” when the stock market reacted . . . badly.
With Trump now gone, Wall Street worried the Fed might consider raising interest rates again. That was silly! Powell was frightened by the stock market in 2018, not by Donald Trump. Nonetheless, Wall Street still gets very quiet immediately before the Fed meets, listening with baited breath.
Yesterday, the Fed met and Chair Powell explained there would be no interest rate increases this year. They raised their prediction of GDP growth this year from 4.2% to 6.5%, with unemployment dropping to only 4.5% by yearend. In addition, they would not scale back their “QE” purchases of bonds for the foreseeable future. In other words, they will not “take away the punch bowl from the party” on Wall Street, at least in the foreseeable future. (Naturally, the dollar sank.)
One observation is that Powell is surprisingly sanguine about inflation rising to 2.4% BEFORE he would become concerned. When he does, that’s when he will start raising interest rates. The Fed is more tolerant of inflation than expected. Another observation is that he thanked Congress for finally providing some fiscal support for the economy by passing Biden’s $1.9 trillion American Rescue Plan. Another is the extraordinarily admission that the Fed supported the economy “with all the tools in our toolbox.” This is extraordinary, because the Fed has always maintained a mystique about unknown tools they don’t tell us about. It would be better to maintain the mystique!
It is often repeated on Wall Street that investors shouldn’t “fight the Fed,” because the Fed is capable of controlling both the economy and the stock market. They remain a strong tailwind for the market. Thank you, Chair Powell!