From an investment standpoint, a more hawkish Federal Reserve is often believed to be problematic. A reduction in monetary stimulus, coupled with rising interest rates, surely cannot be good for stocks, right?<\/p>\n
A quick review of recent history can help us address this question. There is only one previous instance of Fed tapering, in 2013, and the stock market endured some short-term selling pressure in the midst of the QE\u2019s unwinding. But the selling pressure did not last very long. From the time Ben Bernanke announced QE would be reduced (summer 2013) to the actual end of QE (fall 2014), the S&P 500 went up over +20%.2<\/sup><\/p>\n The Fed then started raising interest rates in December 2015, pushing the fed funds rate from 0.5% in December 2015 all the way up to 2.5% by December 2018. As readers can see from the chart below, Fed tightening during the last bull market caused a few blips and pullbacks, but QE tapers and rate hikes were not powerful enough to prevent the stock market from pushing higher.<\/p>\n The S&P 500 Over the Last Decade<\/strong><\/p>\n Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n I similarly do not expect a shift in the Federal Reserve\u2019s current messaging and policy to have a meaningful effect on stocks. The stock market has long known about the Fed\u2019s plans to gradually remove monetary policy stimulus, and a slightly accelerated, well-telegraphed timeline for policy changes should not serve as a negative surprise.<\/p>\n In fact, markets may even welcome an accelerated taper \u2013 since QE purchases put downward pressure on long-dated U.S. Treasury bond yields, QE is effectively flattening the yield curve and squeezing bank profits in the process. If an accelerated taper allows longer duration bond yields to move higher while short-term interest rates remain close to zero, it could spur more bank lending \u2013 a good outcome for the economy.<\/p>\n As for the Fed moving up their timeline for interest rate increases, I think it is important for investors to remember that bull markets tend to end after the Fed\u2019s last rate hike \u2013 not their first one. As readers can see in the S&P 500 chart above, the U.S. stock market can continue to do well even as the Federal Reserve engages in fed funds rate increases. That process may begin in 2022, but it does not mean the bull market has to end as a result.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n In my view, the Federal Reserve\u2019s shifting message and policy is in response to a good problem. <\/em>In the words of New York Fed President John Williams, the U.S. economy is \u201croaring back,\u201d and supply\/demand imbalances are putting pressure on prices. Demand is above pre-pandemic levels, and supply can\u2019t keep up. I don\u2019t see this as a permanent problem.<\/p>\n Even still, the Fed is probably right to take some action, even if only for optics. A slightly accelerated taper timeline and the possibility of rising rates next year are not likely to move the needle on inflation at all, in my view, and I concurrently don\u2019t see much effect of this tightening on the economy or stocks. I\u2019ve written before that corporate earnings and economic growth matter more than the Fed, <\/em>and I do not think a slight shift in the Fed\u2019s messaging and policy will affect either in the coming year.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" A little over a month ago, the Federal Reserve announced plans to gradually unwind (\u201ctaper\u201d) their quantitative easing programs. The […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-8220","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8220","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=8220"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8220\/revisions"}],"predecessor-version":[{"id":8581,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8220\/revisions\/8581"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=8220"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=8220"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=8220"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/zacksim.com\/financial-professionals-insights\/wp-content\/uploads\/2022\/02\/12_pic1.png\")
<\/p>\n