Tech soared on the back of Wednesday’s post-meeting press conference with Fed Chair Jerome Powell, where he referred to this June FOMC meeting as the “talking about, talking about” tapering meeting. A taper tantrum is no longer of any concern to the markets. The Fed just regained control of the inflation and interest rate narrative.
The market has been waiting in anticipation for the Fed to start tapering its $120 billion monthly asset purchases, and some even thought it would happen yesterday. A tapering announcement would come as a relief to investors because the wait would be over, and fear of excessive & persistent inflation would no longer be a market driver.
From my perspective, Jerome Powell’s sentiment and language in yesterday’s press conference indicated that we might start seeing a reduction in Fed asset purchases soon. It would appear that tech traders got the same tapering implication from the chairman, pushing them out of the offer and onto the bid, as optimism reentered their hearts.
Tech’s monster rally is the most interesting move, which was an unexpected price action to a hawkish Fed. Higher interest rates are typically a negative catalyzer for growth sectors because it discounts future cash-flows (which are much more significant for growth companies) at a higher rate. I’m starting to see that the markets have already priced higher rates into high-growth tech, and when higher rates come to fruition, growth stocks might have buyers.
The Fed Shifts Its Guidance
The FOMC predictably maintained its Fed Fund rates and $120 billion monthly asset purchases, but the fundamental market-moving changes came from the Fed’s guidance.
Image Source: Federal Reserve
As you can see from the Fed Funds dot-plot chart above, the Fed’s 2023 predictions have swung toward hawkish policy more quickly than foreseen. Compared to the March dot-plot: 3 more Fed officials are looking for at least 1 rate hike in 2022, while 6 more predict 1 to 6 hikes by 2023. The Fed is now projecting 2 rate hikes in 2023 (when assessing median forecasts). Chairman Powell clarified that the dot-plot chart was not a good indicator of future Fed Funds rates and that the markets should take this data with a grain of salt.
The FOMC sizably drove up its 2021 PCE inflation projections from 2.4% in March to 3.4% today, as pricing pressures accelerate more sharply than initially estimated while the economy rapidly recovers. The central bank’s GDP projection for 2021 expanded from 6.5% to 7%, which reiterates the committee’s view of the hurried speed at which the US economy is recovering.
Jerome Powell highlighted in the FOMC’s post-meeting press conference that inflation has been higher than expected but explained that most of these pricing pressures are being caused by supply chain bottlenecks associated with the economic reopening and will normalize once the economy settles down (aka transitory inflation). He cited the rise and fall of lumber prices as an example of this short-term inflation and its correlation with the economic reopening.
Jerome qualified himself by saying if inflation turned out to be higher and more persistent (emphasizing this word) than anticipated, he would act accordingly (aka raise rates more promptly). Still, Chairman Powell doesn’t consider current inflation levels concerning.
Jerome Powell called this meeting the “talking about talking about” tapering meeting and requested that the “not even thinking about thinking about raising rate” phrase no longer be used. Powell could not provide a specific tapering asset purchase timeline without more data, saying that we all need to be patient. He stated that the FOMC would give advanced notice of any tapering plan before announcing a decision of when it will start tapering.
Powell has an excellent track record of telegraphing the FOMC’s plans to the markets in a way that doesn’t shock anyone. His sweet words of a “far in advance notice” about the FOMC’s tapering plan seemed to push traders back onto the bid after the initial market drop-off.
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