November 28, 2018
The Federal Reserve certainly knows how to put on a show!
Fed Chairman Jerome Powell has been largely silent recently, and even cancelled his previous Federal Open Market Committee (FOMC) news conference. So, Wall Street was all ears when Powell gave a speech at The Economic Club of New York on Wednesday.
Here's what excited Wall Street: Powell stepped back from his hawkish stance to a slightly more dovish stance.
If you recall, back in October, Powell stated that interest rates were "a long way from neutral." But in his comments on Wednesday, Powell said, "Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth."
Translated from Fedspeak: There are a lot of reasons why the Fed should stop raising key interest rates.
First, the Fed needs to consider U.S. GDP growth. The Commerce Department reported this week that third-quarter GDP was a stunning 3.5%, thanks in part to strong corporate profits. Consumer spending increased at a 3.6% rate during the quarter.
However, the U.S. economy is expected to slow down in the fourth quarter. The Atlanta Fed recently reduced its fourth-quarter GDP estimate to an annual pace of 2.5%. Now, upward revisions are possible if consumer spending this holiday season exceeds economists' estimates. Considering that preliminary reports show that Americans are spending 28% more than last year, that's a very good possibility.
Second, inflation is fizzling out. In September, the Personal Consumption Expenditures (PCE) index–the Fed's favorite inflation indicator–fell to 2.0%, down from 2.2% in August. As you know, the Fed's inflation target is 2.0%.
And third, Treasury yields have moderated. Given the stock market's correction in October and November, a flight to quality is now underway. Many income investors have also been driven back to the stock market in search of yield. I should also add that international investors are fleeing the British pound over Brexit concerns.
Clearly, the Fed has several excuses to stop raising key interest rates. But the Fed is also notorious for raising key interest rates in December when Main Street and Wall Street are distracted by the holidays. So, many economists' are still forecasting a fourth key interest rate hike for this year.
Personally, I don't think that Powell's comments today were dovish enough. Yes, they sparked a stunning market rally. The Dow surged more than 600 points higher, which was the Dow's largest one-day gain since March. And the S&P 500, Dow and Nasdaq closed the day 2.3%, 2.5% and 2.9% higher, respectively.
But the December FOMC statement will be much more important.
We need an incredible dovish statement where the Fed acknowledges that economic growth has slowed, inflation has moderated and the Treasury yields have stopped rising. If that happens in December, it won't matter if the Fed raises rates or not. The stock market will surge higher.
In the meantime, I'm advising subscribers to my premium newsletters to focus their investments on dividend growth stocks and stocks with superior fundamentals. Given the current flight to quality and drop in Treasury yields, these stocks will be ripe for the picking in the coming weeks.
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