Most Had A Financially Good 2020?

We suggested the market might come to understand the Fed’s new average inflation targeting policy following its March meeting. However, that hasn’t fully happened yet. The Fed’s raised GDP and inflation outlook didn’t change its zero percent interest rate policy. It still doesn’t expect to hike rates through 2023. As you can see from the chart below, the market is still expecting more rate hikes than the Fed is guiding for. If the market was an FOMC member, it would be the most hawkish member.

Even the market’s long-run rate is higher than the Fed’s midpoint. It might take longer for the market to realize that the Fed isn’t going to hike anytime soon. Many traders believe the Fed will be forced to hike by the market. That generally doesn’t happen. The market can force the Fed to cut rates by cratering, but it can’t force the Fed to hike rates. The only thing that can force the Fed to hike is spiking inflation.

We saw markets mistakenly price in hikes for most of the past expansion. The market was wrong for years before the hike cycle started. We’re in a similar situation except the recovery will be quicker and fiscal policy is more expansionary. Furthermore, the temporary bout of inflation should be larger than any peak in the past decade. You can say it will be tough for the Fed to avoid reacting to a temporary rise in inflation. However, it would also be hard to hike rates this year or next year without losing credibility because it has been so dovish at the past few meetings.

Everyone Wins In 2020?

If someone would have told you 2 years ago that in 2020 there would be a pandemic catalyzed recession, yet everyone’s net worth would rise, you wouldn’t have believed them. The scale of the fiscal and monetary stimulus following the pandemic is unappareled in the past few decades. Wealth was transferred to Americans at the expense of the government and the Fed.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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