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“Most kitchens have the same spices in the spice rack. That does not mean everyone is a good cook.”
– anonymous
The slow shift in U.S. central bank policy lurched ahead today. Compared to its highly accommodative policy during the peak of the Covid pandemic, a significantly less accommodative stance was outlined by Federal Reserve Bank Chairman Jerome Powell today at a 55-minute press conference, broadcast live on YouTube, in which Mr. Powell answered reporters’ questions.
The Federal Reserve began shifting to a less accommodative stance in November. Essentially admitting its inflation forecast had been wrong for months, the Fed has been slowly reversing its former policy.
What went wrong? The Fed had underestimated the impact of pandemic-related problems, including supply chain snafus, lower than expected growth in the U.S. workforce, and a boom in consumer spending financed by government policy to prevent an economic collapse, amid the near-shutdown of the U.S. economy in March 2020. It was a lot of unprecedented events and data, so the Fed’s mistake was understandable.
During Mr. Powell’s speech today, stock prices tumbled sharply. Losses narrowed by the end of the trading day, about 30 minutes after the Fed chair’s press conference concluded. The Fed chair was widely perceived, according to press reports, as more hawkish on inflation than had been expected. That’s a matter of nuance.
What’s more important to investors to focus on is the growth rate in gross domestic product (GDP). GDP growth drives corporate earnings, and earnings drive stock prices.
So, it is notable that fourth quarter 2021 growth, which will be released by the U.S. Government at the end of January, is expected to come in at 5.8%! That’s more than 250% higher than the 10-year GDP growth rate of 2.2% projected by the U.S. Government’s nonpartisan research arm, the Congressional Budget Office (CBO).
The 5.8% growth projection for the final quarter of 2021 comes from The Wall Street Journal’s quarterly survey of 60 leading economists. For 2022, the consensus forecast, according to WSJ’s survey, is for a growth rate in each of the four quarters of 2022 of slightly more than 3% -- again, much higher than the 2.2% long-term U.S. growth rate expected by CBO.
Strong GDP growth projections is obviously good news for investors. However, Fed mistakes have caused almost every recession since 1950, and, today, as the Fed took a tougher than expected stand on inflation, a new risk of a Fed policy mistake choking off growth emerged.
For the first time since the 1980s, the Fed is managing high-growth, high-inflation economic conditions. The Fed is being very deliberate and transparent about its policy, which makes it rational and understandable to a financial professional.
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