Liz Looks at: the Fed’s June Statement

Taper Tease, Rate Rethink

In this week’s much anticipated Fed meeting, the Federal Open Market Committee (FOMC) held rates steady in the range of 0–0.25% and held monthly asset purchases steady at $120 billion. Many were wondering whether the Fed would signal tapering their asset purchases and were met with an anticlimactic “not yet” signal. What did come out of the meeting was an increased possibility of a rate hike in 2022 and two hikes in 2023 as reflected in the new FOMC dot plot.

The market’s initial reaction to the news was negative, which is natural—I’ve never met a market that liked the prospect of rate hikes. But in the wise words of Wharton’s Jeremy Siegel, this is likely more of a tremor than a tantrum.

Digesting the News

Realistically, nothing has changed for the near-to-medium term. All voting members of the FOMC still support keeping rates near zero for the remainder of 2021. As we know, however, the market is a discounting mechanism and looks out into the future, trading on expectations not events. This is a period of digestion while investors evaluate what an earlier rate hike might mean for stocks and bonds.

Let’s keep in mind the timeline. The Fed swiftly went to zero back in March 2020 when we were thrown into a financial frenzy by a global pandemic. We sit here today, 15 months later, with an economy that’s nearly back to pre-pandemic levels of GDP, inflation that’s come back to life, and consumers who are eagerly spending on services again as they’re welcomed back by businesses everywhere.

We’ve come a long way.

The Emergency is Over (at Least for Now)

With that backdrop, it actually seems naive to assume we wouldn’t raise rates until 2023. A Fed policy rate near zero is fit for an emergency situation—one where the economy needs stimulation to grow and create jobs. We are not yet finished with the recovery, but the emergency seems to be over.

At some point then, rates need to go up. Carefully raising rates can help inflation stay contained and, maybe more importantly, can give us some tools to work with in the NEXT recession, whenever that may be. Markets have gone up in rate hiking cycles before, and they can again, if we’re careful.

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