Investors seen mistaking inflation rise in Fed stance

Manufacturing Slack

Rates remain low also because there’s “so much slack in global manufacturing capacity” that hasn’t been adequately factored into investors’ models, while declining commodities suggest consumer prices aren’t rising fast enough for the Fed to change its stance, Morgan said.

In its most-recent meeting, the FOMC reiterated that it will keep the target range for the federal funds rate close to zero as members agreed that it would be appropriate to maintain the existing “highly accommodative stance of monetary policy,” according to the minutes released April 10.

The minutes again showed that several officials said the central bank should begin tapering its quantitative easing program later this year and stop it by year-end. This suggests there’s still debate among policy makers, Smith said, adding that investors have been trying to make sense of some “very confusing messages” as there could be an ideology shift ahead of Jan. 31, when Bernanke’s term ends.

If U.S. economic growth were to accelerate faster than the Fed is forecasting, this could hasten higher rates. “A lot of people are asking me for ideas to protect against inflation” in anticipation of such an outcome, Smith said.

Rising Yields

“If a portfolio manager has a view that 10-year yields will be rising, this is a group of stocks that is likely to do well,” said David Kostin, chief U.S. equity strategist at New York-based Goldman Sachs. The company’s economics group forecasts Treasury yields will increase to 2.5% by year- end. Investors who share a similar outlook may be interested in the stocks in the rate-sensitive basket, which are “likely to outperform the broader equity market during this horizon.”

It’s important for central bankers to provide visibility about policy changes so as not to “shock the markets,” Ghriskey said.

“This is a very slowly evolving cyclical recovery, and the Fed doesn’t want to stomp on that or interrupt it in any way by raising the federal funds rate too early because this would squash economic growth.”

Bloomberg News

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