Analyst Note| Eric Compton, CFA |
In its latest statement, released on April 28, the Federal Open Market Committee unsurprisingly held the federal-funds rate at 0.0%-0.25%. Nobody expected a change in rates this meeting, and there were no new economic projections released, therefore, this was arguably a low-key event. Instead, the focus remains on any changes in the Fed’s language in the release and any hints at balance sheet tapering. There were no hints at tapering, and we don’t expect even a hint at tapering until the economic recovery is well on its way, at least for a couple more months--and we expect that any actual tapering will be telegraphed well in advance. The key debate today is how high inflation will get, if it will be transitory, and how long the Fed will hold off on rate hikes as inflation progresses. Based on our read of the Federal Reserve's most recent statements, we don’t plan to make any changes to our current rate forecasts in our U.S. bank models, although we admit that the risks to inflation seem to be toward the upside, and therefore rates hikes could happen sooner in a hotter environment.