Fed leaves rates near zero, issues gloomy outlook — what to watch now

The Fed is on standby.

The central bank voted on Wednesday to keep short-term interest rates near zero, with Fed Chairman Jerome Powell saying at a subsequent news conference that officials are "not even thinking about thinking about raising rates."

Fed officials also predicted that U.S. economic activity would contract by about 6.5% this year, but jump by about 5% in 2021.

Here's what to watch after the Fed's statements:

David Zervos, chief market strategist at Jefferies, said the Fed's economic outlook was "pretty bleak":

"At the end of 2022, we still have an unemployment rate, according to the Fed of 5.5[%], which is well above their [Non-Accelerating Inflation Rate of Unemployment] estimate. So, this is a pretty unfriendly economic forecast, but then you have a Fed chair that's telling you, 'Hey, I got you. I got your back. I'm going to do more if I need to. I'll do whatever it takes.' And so, I think the market's got to tussle with those two things. I came away from the press conference, though, feeling pretty good even with the very downbeat forecast, which may or may not be correct. As Jay said, we should all feel pretty humble when thinking about making these forecasts and also humble about the ability of the Fed to create inflation, which is something that they're very concerned about and were concerned about going into this. So, I think that the overwhelming story is not the economic outlook, it's that the Fed is there with programs, with everything that it's put in this to make sure that if we do have a second wave or another bout of weakness for any reason, we're just going to get the stimulus coming back in. And the last thing he said … when the market kind of took a little move back up — not huge, but it definitely seemed to react to it on the last question — was when someone tried to ask him about, 'Do you care about stocks all being up since the lows?' … And he said, 'We don't really care. We're not here to sort of call a bubble or not a bubble. We're here to make sure there's maximum employment and price stability.' So, really not sort of putting a lid on stocks. … I thought that was a pretty strong comment for the stock market, like, 'Don't give us a whole bunch of flak for doing our job, which is trying to get jobs back and get inflation back to target, and we're not really going to get worried about some nebulous concept of financial stability as it relates to where the equity markets are.'"

Michelle Meyer, chief U.S. economist at Bank of America Merrill Lynch, said investors need to pay attention to more than just the surface-level economic data:

"Fed Chair Powell made it very clear that there are a lot of challenges ahead for the economy and gave an outlook that was still quite concerning. Look, we can have an initial bounce, but then, certainly, there could be problems thereafter. The Fed is very convinced that there is going to be a disinflationary environment for some time. I mean, look at the [summary of economic projections] forecast, below 2% through the forecast horizon. The way that Chair Powell talked about the inflation backdrop with slack remaining in the labor market — and even when you get to full employment, it's not obvious that that will be sufficient to generate higher wages and higher price pressures. So, yes, there's a lot of stimulus that's pumping in through the economy both on the fiscal front and on the monetary side, but there are a lot of things that need to happen in order for that stimulus to become inflationary. You need to have a Phillips curve that's active. You need to have wages that are picking up. And I think that Powell communicated very clearly that they are not going to be convinced that there is an inflationary push, that there is a trend higher of inflation, until they see it. Just an unemployment rate that's below target is not sufficient conditions to believe that there will be higher inflation."

Kourtney Gibson, president of Loop Capital, had a message for individual investors flocking to the stock market:

"I do think that Chairman Powell is doing an incredible job navigating through these unprecedented times, and I think it's worth noting that he is being very cautious as it relates to his comments and we need to be able to appreciate that because, ultimately, we're in a situation where you can't have people thinking that it's going to be rosy down the road. I mean, there's a reason why interest rates, he said, will be kept low. And not only that, he said, 'I'm not even thinking about thinking about raising rates.' So, that should tell you something. So, as investors, I think right now, you have to have a view. And this is the stock market and you have to decide, OK, am I willing to lose? And if I'm not willing to lose, should I be playing? And we're seeing a lot of retail investors now getting involved and seeing the spike in whether it's the E-Trades of the world and even via Cash App that people can now invest, we have to be very, very careful as it relates to the messaging that we're providing to regular retail investors, let alone our high-end institutional investors that know what they're doing. We have to protect our people that are out there right now that are saying, 'Oh, the stock market does nothing but go up' because we all know that that's not true. And so, I thought it was very prudent of Fed Chairman Powell to outline the potential risks and potential problems that we may see as we move forward here. Possible resurgence. We're seeing 21 states with Covid now spiking again. I mean, you cannot ignore the reason why he's saying he's going to keep rates low. So, I think the bottom line is, in a nutshell, if you have an investment philosophy, stick with it, remain diversified and understand your risk tolerance."

Mohamed El-Erian, chief economic advisor at Allianz, said he wanted more out of Powell's comments:

"He didn't give additional information on the key issues that the market is thinking about, and you saw that in the reaction of the market. While I agree with Mike Santoli that the verdict, the final verdict, is not in, you saw the market go up on the statement and go down during the press conference, and that's because the marketplace waits for more information. The second thing he sidestepped was the disconnect between the real economy and the financial markets. And that's important not if you're buying assets that are covered by the Fed, but if you're buying assets that are not covered by the Fed. It's also important for the Fed itself because it opens it to criticism, criticism that has been fueled by how long it has taken them to get the Main Street lending program there. So, that's why I was more hesitant than others about the statements that were made during the press conference."

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