What the Fed’s outlook means for rates, investing

By Staff, with files from The Associated Press | February 21, 2018 | Last updated on February 21, 2018
2 min read

Federal Reserve officials at their January meeting believed that improving global economic prospects and the effects of recently passed tax cuts had raised the prospect for solid economic growth and for continued interest rate increases in 2018.

The minutes of the Fed’s Jan. 30-31 discussions showed that the officials were more optimistic about the economy than they had been in December. They noted a stronger U.S. and global economy and rising expectations that the tax cuts passed in December would boost growth.

The minutes said that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.”

In an emailed note to clients, Royce Mendes, director and senior economist at CIBC World Markets, said nothing in the minutes “should materially change market pricing. While acknowledging the lift from fiscal stimulus, the Fed isn’t moving away from its gradualist approach.”

Despite the upgrade in the economic outlook on the part of some Fed members, “there are still those on the committee that remain skeptical about the prospects for inflation,” he added. “Doves continue to contend that policymakers should be patient in trying to coax inflation higher.”

CIBC’s outlook for three Fed rate hikes this year remains, says Mendes, “given the balance between upside risks to growth and below-target current pace of inflation, which leaves time for policymakers to use a gentle hand.”

The Fed didn’t raise rates at the January meeting, which occurred before the February stock market correction and turbulence.

The next meeting is March 20-21.

Inflation expectations increase

A market report from Richardson GMP discusses U.S. inflation and why it’s been slow to appear until recently.

With wage growth accelerating and inflation expectations rising, the authors say inflation isn’t fully priced in the market. They expect a potential shift from deflation to inflation to result in bond yields creeping higher.

“Not only is this a negative for bond prices but also for interest rate sensitive equities and equity multiples, because as the discount rate rises, future cash flows are worthless,” says the report.

That will place an emphasis on stock selection and sector allocation, the authors forecast.

“Should this play out, active managers may come back into vogue after years of aggregate underperformance to their passive foes,” says the report.

Read the full Richardson GMP report and the Fed minutes.

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Staff, with files from The Associated Press

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