S&P Stirs Near Highs, Russell 2000 Breakout Ahead Of Inflation, FOMC

The run in equities from the lows set last March has outstripped even the wildest expectations for how equities would perform through a global pandemic. While last March was troubling, much of what’s happened since has been to the bewilderment of bears as prices have just continued to punch higher through the recovery.

Of course, there’s a very obvious reason for this, and that’s the brute force accommodation provided by the Federal Reserve to help the US economy grind through this otherwise difficult period. As data has started to show more and more optimism, the big question has become when the Fed might start to scale back some of that accommodation and, as of this writing, there are few signs to indicate that anything is yet on the horizon.

This could change in a week, however, as a really big FOMC rate decision sits on the economic calendar for next Wednesday. Few are expecting any rate hikes or announcements of taper or anything tangible, really. The devil is in the details here, and market participants are likely going to be parsing the details of the Fed’s statement and accompanying press conference for any sign of ‘less loose’ policy on the horizon. What makes this meeting more interesting is the fact that it’s a quarterly meeting, so we’ll also be getting updated forecasts and projections, and this will highlight just how optimistic the Fed is and when the bank may look to start adjusting rates.

At the core of that argument around policy is the prospect of inflation. The saga around inflation in response to stimulus goes back for a decade now, when the Fed was able to embark on multiple rounds of QE in the post-GFC backdrop without yet exposing the American economy to the runaway inflation that many feared it would produce.

When Covid came into the equation last February and March, the Fed threw the kitchen sink at the matter, allaying inflation worries for another day. What the bank did worked, and support was soon in play before stocks went flying into the summer. Along the way, the Fed appeared to try to head-off that worry around inflation, changing their approach to targeting ‘average’ inflation in which they said they’d be more accepting of above-average inflation prints.

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