In a unanimous decision, the Federal Open Market Committee (FOMC), the arbiter of monetary policy, in no uncertain terms left interest rates unchanged. Furthermore, the FOMC stated that: “Inflation continues to run below 2 percent;” that, “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations” and, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run’” though inflation is “running persistently below this longer-run goal.”
FOMC Chairman Jerome Powell, during his press conference stated that the Federal Funds target will remain at current levels through the end of 2023. He has finally learned how not to spook markets. Instead, yesterday he gave the green light to markets to expect an accommodative monetary policy for the next three years.
One fact that escapes most people with about $5 to $6 trillion in Congressional “COVID” relief legislation in the past year, is the amount of interest that will have to be paid on the money which the Treasury will borrow to foot the bill. Note that I put that term COVID in quotation marks because a great deal of what was legislated is not for COVID relief. To quote Sen. John Kennedy of Louisiana, there is “chock full of spending porn” in these bills. So, for example, an increase in rates of just ½% would cause the Federal Government to pay an additional $30 billion in annual interest expense. Not exactly loose change. The FOMC will feel pressure to maintain rates at current levels for an extended period of time in order to keep debt service as low as possible, because it will be hard to generate revenues to pay the debt let alone increases in interest payments.. To quote Sir Winston Churchill “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” I expect plenty of the monies in these laws to never see the light of day.
I think that what we are witnessing in the bond market is just a normal steepening of the yield curve, which is a sign of healthy economy. The FOMC’s pronouncements today removed two of the troubling bricks in the “wall of worry” – interest rates and inflation. As such, many investors, economists, and analysts will update their models to reflect tame inflation and no change in rates till 2024.
Out of all this, I expect that the rather disruptive rotation out of growth into value in the stock markets will quiet down. With low interest rates, the fear of adverse consequences from higher interest rates on technology and growth companies will abate. I also believe that the rush to buy financial and energy companies may be over. Let them come in 10 – 15% before looking for entry points. If you must own one, may I suggest JP Morgan (JPM) which has been a long-term staple in our Dividend Value portfolios. However, be selective and maintain some balance between growth and dividend / value.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long JPM – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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