Fed’s dovish tone
While talking to CNBC on March 21, the “bond king” and DoubleLine founder, Jeffrey Gundlach shared his views on the Fed’s recent meeting and what it could mean for the markets. Gundlach was surprised by the Fed’s significant pivot without any major justification.
The Fed held its two-day policy meeting on March 19–20. The Fed’s stance on future rate hikes was more dovish than the markets expected. Looking at the projections, the Fed sees the federal funds rate at 2.4% this year, which means no implied rate hike this year—down from two rate hike expectations in December 2018. The projected rates for 2020 and 2021 have also been lowered by 50 basis points.
Markets’ rally YTD
The Fed vowed to go slow on its balance sheet reduction plan. The Fed expects to halt the process in September. The markets have been rallying in 2019 due to the Fed’s narrative change at the beginning of 2019. As of March 21, the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) have risen 13.9%, 11.3%, and 18.4% YTD (year-to-date), respectively. NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron (MU), General Electric (GE), and Microsoft (MSFT) have risen 37.8%, 51.1%, 38.6%, 41.1%, and 18.4%, respectively.
Markets are confused
While lower interest rates benefit stocks, markets are confused about the Fed’s dovish rate hike outlook. The significant change would have warranted reasonable weakness in the US economy, which isn’t the case. Even weaker global growth or geopolitical concerns would have been valid reasons for such a dovish turn. The Fed didn’t acknowledge its stance as being a product of these concerns.
Next, we’ll discuss Gundlach’s views about the Fed’s U-turn in more detail.