Fed Up: Will Inflation + Rate Hikes Kill Stock Spikes? Full Fed Meeting Recap

“Inflation could turn out to be higher and more persistent than we expect” – Jerome Powell

Federal Reserve hikes 2021 inflation forecast…
Two rate hikes likely in 2023…
Stocks fall while Treasury yields rise…

Rate hikes are now on the calendar for the Federal Reserve as inflation pressures continue to rise.

The Federal Open Market Committee wrapped up its two-day policy meeting today, voting unanimously as expected to keep interest rates unchanged at a rate of 0% to 0.25%.

Wall Street was looking for guidance on the bank’s plans for tapering of its monthly asset purchases but the post-meeting statement didn’t address those questions.

Instead, the bank remained focused on inflation.

Table of Contents

1 Fed Hikes Inflation Expectations, Pencils in Rate Hikes
2 Powell Commits to Supporting the Economy
3 Market Reaction
4 One Platform. One System. Every Tool

Fed Hikes Inflation Expectations, Pencils in Rate Hikes

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The Central Bank’s updated Summary of Economic Projections shows headline inflation rising to 3.4% by the end of 2021.

That’s up a full point from their previous projection in March but the FOMC statement continued to insist the recent inflation is “largely reflecting transitory factors”.

In his press conference following the meeting, Fed Chair Jerome Powell admitted that inflation has risen “notably”.

“As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect,” said Powell.

But the bank remains focused on its longer-run inflation goal instead of the immediate price increases Americans are seeing.

Headline inflation expectations for 2022 were raised to 2.1% while expectations for 2023 were raised to 2.2%.

Despite both of those numbers being higher than the March forecast, the Fed says longer-run inflation will be 2.0%.

The higher-than-expected inflation seems to have forced the bank to move up its timeline for rate hikes.

The bank’s dot plot now shows two rate hikes in 2023, earlier than previous plans to hold rates near zero until 2024.

13 members of the FOMC said they see at least two hikes that year while just five said they see rates holding steady through the end of 2023.

Further, seven of the 18 members said they see the Fed possibly raising rates as early as 2022.

But Powell said those projections are meant to be taken with “a big grain of salt” and the dot plot does not guarantee any future moves on interest rates.

Although the FOMC did not address asset purchases in their statement, Powell said they did begin discussions about tapering.

“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” said the Chairman.

But he also reiterated his previous stance that the economic recovery has a long way to go.

“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” Powell said. “In coming meetings, the committee will continue to assess the economy’s progress toward our goals. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”

Powell Commits to Supporting the Economy

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Despite the FOMC’s statement seeming to be more hawkish, Chairman Powell said they “will do everything we can to support the economy for as long as it takes to complete the recovery.”

The Central Bank hiked its expectations for economic growth this year, projecting GDP to rise to 7% from the previous forecast of 6.5%.

Powell said factors weighing on the U.S. labor market “should wane in coming months against a backdrop of rising vaccinations, leading to more rapid gains in employment.”

Expectations for the unemployment rate by the end of the year were unchanged at 4.5%.

Powell encouraged the continued distribution of vaccines across the country, warning about a recent slowdown and the threat of new variants of the virus.

“Progress on vaccinations has limited the spread of COVID-19 and will likely continue to reduce the effects of the public health crisis on the economy,” said Powell. “However, the pace of vaccinations has slowed and new strains of the virus remain a risk. Continued progress on vaccinations will support a return to more normal economic conditions.”

Market Reaction

Wall Street fell sharply following the Fed decision before tapering some of those losses into the close.

The Dow Jones closed 0.77% lower, while the NASDAQ fell 0.24%, and the S&P 500 dropped 0.54%.

While stocks fell, Treasury yields moved higher.

The yield on the 10-year Treasury note rose 6 basis points to 1.562% while the yield on the 30-year bond was up to 2.204%.

But those yields gave up most of their gains amid Powell’s talk about the end of QE still being a ways off and his caution on the seriousness of expected rate hikes.