Fed Reduces Economy Inflation Concerns

by Michael London | 03/17/2021 4:14 PM
Fed Reduces Economy Inflation Concerns

Stock markets react favorably to positive economic news.

The market took a bounce Wednesday afternoon when investors finished digesting a critical monetary policy decision and moved on to take a better look at new economic data. It rose, with yields climbing over the benchmark at about one-and-and-a-a-half percent.

The S&P 500 gained around 0.2%, while the DJIA reached a peak of over 33,000. The Nasdaq stabilized from earlier defeats and posted a favorable stock exchange price for the first time in a long time. Concern about the effects of the worldwide virus pandemic pushed the VIX to a new one-year low of 19.2, the lowest amount in a year.

The Federal Reserve interest-rate announcement was fixated on the central bank's latest forecast Wednesday afternoon. Fed officials' median forecasts maintain their projection that total interest-rate-rates will be flat, and interest rates are expected to stay at zero until at least to the year 2023 in the new estimates. Nonetheless, the seven Federal Open Market Committee had predicted a pace of at least one rate increase by 2018.

It has raised its projections for U.S. joblessness and inflation in the coming years. Committee participants currently predict that the jobless rate would decrease to 4.5% by the end of the year, with a year-end inflation rate of 2.4%. At the beginning of the year, the Fed projected the jobless rate to increase only to 5 percent. Still, they figured that personal spending expenses would grow by only 1 percent during that period. As previously predicted, the Fed now expects real GDP to rise by 6.5 percent in 2016, compared to its earlier estimate of 4.2 percent.

Using the forecasts, the central bank illuminated the economic picture and provided investors another clue regarding monetary policy changes shortly. With consumer and corporate sentiment remaining stable, the economy improving, and unemployment reaching 6.5 percent, the Fed has indicated that it would maintain monetary policy relaxed, with interest rates around zero and asset sales at $120 billion a month.

Concerns that a rapid increase in inflation could cause a quicker-than-expected tightening of monetary policy sent investors to the sidelines. It led to replacing investment positions into risky companies, including energy and financials during the preceding weeks, deepening the cyclical stock market downtrend in those weeks.

"The Fed increased its estimate of the U.S. economic development for the year 2021 to six and a half percent. Assuming this research indicates that, by the year 2022, the United States' economy would be more significant than before the pandemic.  Seema Shah, the chief strategist of Principal Global Investors, wrote in an email to Yahoo Finance that now is the time to start riding this bull market when the market is at its peak.

Despite this strong forecast, the Federal Reserve believes that inflation will stay under control, as evidenced by their projections which show an undershoot of just 2% overshoot.  Shah clarified,  some Fed policymakers see the chance of a rise in interest rates over the next decade."


                Fed Chair Jerome Powell delivers remarks on the FOMC meeting and Fed policy




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