Stocks finished mixed as Federal Open Market Committee Chairman Jerome Powell reiterated his dovish stance by saying, "We're not thinking about raising rates, we're not even thinking about thinking about raising rates." The Federal Reserve's economic projections were also notably pessimistic. In response, long-term interest rates dropped.
As a result, cyclical and value industries that have recently been strong were the biggest losers. These stocks gained when long-term rates were perking up as some were betting on an acceleration in growth. In contrast, mega-cap technology stocks were big winners. This group has been lagging the past couple of weeks, but they are the biggest beneficiaries of a low-rate, low growth environment.
In a sign of this dichotomy, the Russell 2000
Key Takeaways
Going into the meeting, the major uncertainty was the scale and duration of the Fed's asset purchases especially as the most precarious parts of the crisis are over. Despite material improvements in financial and economic conditions, the Fed is going to buy $120 billion per month until inflationary risks arise. In comparison, QE3 was $40 billion per month.
Powell also continued his recent rhetoric of emphasizing that the Fed still has many tools left that it could deploy and is nowhere out of resources. In a sense, he is simply telling the market that he has many more bazookas and ammo in the closet. It's similar to how the Fed announced they were going to buy corporate bonds and almost instantly, spreads on all assets and durations improved even before the Fed bought anything.
Along these lines, Powell also hinted at a new angle it could take via "yield curve control" which a more aggressive step that the Fed could take to inject liquidity beyond asset purchases. The Fed's dot plot saw some changes with the average participant projecting zero percent rates till the end of 2022. Additionally, they downgraded forecasts for economic growth in 2020 but anticipate a 5% growth in 2021. On the topic of asset bubbles, Powell doesn't seem concerned. His focus is on doing whatever it takes to maximize employment as long as inflation is below 2%.
Based on past press conferences, Powell has mused about letting inflation get above 2% in a "symmetrical" way which means that inflation should be allowed to exceed 2% for the same length of time that it stayed below 2% which it has since 2008. The two constraints to Fed intervention are inflation and fear of an asset bubble. Currently, neither is on his radar.
