Fed Chair Powell gives stocks the all-clear to keep moving higher

Published Wed, Apr 28 20215:09 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

The Fed upgraded its view on the economy and said inflation could rise, but temporarily.
But Fed Chairman Jerome Powell said the central bank was not close to discussing winding down its bond buying, which would be a first step toward ultimately raising interest rates.
Since the tapering of the bond program is expected to take as much as a year, market pros said Powell signaled that rates will stay low for a long time, and the environment will be positive for stocks and other risk assets.

Fed Chairman Jerome Powell signaled that the central bank is not looking to tighten policy any time soon, a bullish sign for stocks and other risk assets. Powell spoke following the Fed's two-day meeting Wednesday and surprised bond market pros with his comments that the central bank is not close to discussing paring back its $120 billion a month bond-buying program. Some strategists have expected the Fed to discuss tapering purchases as soon as its June meeting. In its statement, t he Fed acknowledged that the economy is improving, and it expects a spurt of higher inflation, albeit temporary. Powell told the press briefing that there was still a large amount of slack in the labor market, despite improvement. Michael Arone, chief investment strategist at State Street Global Advisors, said Powell's comments are good for risk assets and growth stocks. The stock market tried – but failed – to rally on the Fed chief's comments. Meanwhile, bond yields inched slightly lower. Yields move opposite to prices. "He's focused on inflation which is transitory and the labor market which has a tremendous amount of slack and a long way to go," said Arone. "Markets are buying into the fact rates are going to stay low," he said. "This idea that rates won't accelerate quickly, I do think helps soften some of the concerns that accelerating interest rates were going to be a headwind for growth stocks. I guess that's good news for asset prices." Mark Cabana, head of U.S. rates strategy at Bank of America, said the Fed's statement was as expected but Powell surprised on the dovish side. "I do think the punch bowl got some more rum in it based on the press conference," Cabana said. He added that Powell set the stage for a "risk on" market response. Looking toward progress in the summer Cabana had expected the Fed to begin discussing winding down its asset purchases this summer and then begin reducing them in January. Powell has previously made it clear the Fed would taper off that program before raising interest rates. The Fed purchases about $80 billion Treasurys and $40 billion mortgage-backed securities each month. Powell has said the Fed needs to see "substantial further progress" before it begins to slow its asset purchases. On Wednesday, he said the central bank is not there yet. "That's very, very dovish from Powell," Cabana said. "And it really shows that Powell is going to be in no rush at least in the near term and wants to continue to see a material improvement in the economic data before changing the Fed's stance." Michael Schumacher, head of rate strategy at Wells Fargo, said the Fed is signaling that yields should not go much higher. The 10-year Treasury yield fell to 1.60% from about 1.64% before the Fed's 2 p.m. ET statement. "Yields have come off just slightly, not much," Schumacher said. "He's certainly getting rid of tapering happening any time soon. He's slamming that door shut." "It means that yields are a little less likely to go rocketing up," he added. "You're not going to get that wild card event where the Fed does talk about tapering fairly soon. This meeting was always going to be a lot more of a snoozer." Schumacher said that by the next central bank meeting in June, there should be several reports that show inflation heating up. "There will be more pressure on the Fed to explain this inflation framework," he said. Cabana said strong data will continue to roll in, and the next two employment reports could show job creation of a million or more each month. "If we get back to back near million job growth numbers, the Fed could change its tune," he said. Markets would not be prepared for a sudden change in the Fed's position because it is still unclear what Powell meant by "further substantial progress," Cabana said. "That creates the risk of a coiled spring," he said. "Once they begin to shift, it's on a spring release and that could have some adverse impact [on markets]." Mark Zandi, chief economist at Moody's Analytics, said the central bank is focused on the pandemic as it makes policy decisions. "I don't think he will even hint at tapering until we are clearly on the other side of the pandemic," he said. "Herd immunity is a necessary condition for the Fed to begin taking its foot off the monetary accelerator," Zandi added. "By my calculation that could be by the mid-June [ Federal Open Market Committee ] meeting, but more likely by the late-July meeting." The central bank could take even longer to discuss tapering, said Jim Caron, head of global macro strategies on the global fixed income team at Morgan Stanley Investment Management. "The Fed's [modus operandi] is to discuss major policy changes at the August Jackson Hole symposium and then make an official announce at the September FOMC," he wrote in a note, referring to the Federal Reserve Bank of Kansas City's annual economic policy symposium. "Best guess is the Fed follows this timeline, all else equal," Caron wrote. "But this may be the earliest they signal tapering." Become a smarter investor with CNBC Pro . Get stock picks, analyst calls, exclusive interviews and access to CNBC TV. Sign up to start a free trial today .

Federal Reserve Chair Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill, Washington, December 1, 2020.

Al Drago | Pool | Reuters

Fed Chairman Jerome Powell signaled that the central bank is not looking to tighten policy any time soon, a bullish sign for stocks and other risk assets.

Powell spoke following the Fed's two-day meeting Wednesday and surprised bond market pros with his comments that the central bank is not close to discussing paring back its $120 billion a month bond-buying program.

Some strategists have expected the Fed to discuss tapering purchases as soon as its June meeting.

In its statement, the Fed acknowledged that the economy is improving, and it expects a spurt of higher inflation, albeit temporary. Powell told the press briefing that there was still a large amount of slack in the labor market, despite improvement.