Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Closer, But Still Not Close
Posted Under: Employment • Government • Inflation • Markets • Fed Reserve • Interest Rates • Spending • Bonds • Stocks • COVID-19
Supporting Image for Blog Post

 
Nobody expected the Fed would lift interest rates today. In fact, virtually nobody expects them to raise rates before the end of next year (and the March dot plots show the Fed's own forecasts have them on hold through 2023).  But there are actions – such as tapering asset purchases – that are likely to come before rates lift off.  And indeed, this was the first question out of the gate as the Q&A portion of Chair Powell's press conference began.  In response, the Chairman stated that the Fed is not even "talking about talking about tapering," before elaborating on a few of the reasons the Fed expects to be on pause for the foreseeable future.

First, on employment, the Fed wants to see a string of strength in job creation. While the March gains were strong, it was only one month, and nonfarm payrolls remain down more than 8.4 million from pre-COVID levels. Even with record employment growth in 2021, the employment market is likely to remain below pre-COVID levels for a while. The economy is not a light switch, and when things were shut down last year, it caused lasting damage. Hundreds of thousands of companies closed their doors, and it will take time for jobs to get back to where they were. With damage concentrated among low-income jobs, the employment mandate is likely to be the key factor keeping policy accommodative for a while.
 
Chair Powell also reiterated the Fed's belief that labor market slack – and not the massive increase in the M2 money supply – will be the primary factor preventing inflation from moving sustainably higher.  In the short term, he said, inflation is being pushed higher for two reasons:  1) base effects, meaning that readings will run high in the short-term simply due to the low levels we are coming off of, and 2) supply chain bottlenecks, which the Fed expects will be resolved as companies and workers get back towards normal. In effect, the Fed puts little weight on the above-trend inflation readings that look likely in the coming months. We expect that inflation pressure from massive money printing will sustain even as supply chain issues ease, but only time will tell.

In the meantime, the Fed will continue to purchase Treasury securities at a pace of $80 billion per month, and agency mortgage-back securities at a pace of $40 billion monthly. For now, the Fed will remain incredibly accommodative. This means faster economic growth (and positive backdrop for equities), but the risk into the future of too loose for too long is rising. The good news is that entrepreneurship is not dead, businesses will re-open, and the US will benefit from productivity gains as a by-product of technology adoption forced by the COVID-19 disaster. Growth will continue, and at an above-trend pace, but the sugar high from spending and loose policy warrants careful scrutiny in the year ahead.

Click here for a PDF version
Posted on Wednesday, April 28, 2021 @ 5:32 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.