The Fed's new strategy aims to learn from the last recovery and run the economy hot, bucking the decades-long precedent that explicitly links price growth with hiring.
Recent weeks have been frothier. Tech sell-offs have been followed by dip-buying as traders moved their focus from inflation concerns to reopening optimism and back again. The 10-year yield continues to climb, but at a slower pace than seen earlier in March. Markets are seemingly at a crossroads, waiting to see just how strong the recovery ends up being.
If value stocks and recently unloved sectors become the market's new winners, the growth giants and Treasurys that thrived for more than a decade are likely to lose. Growth stocks' valuations are closely tied to interest rates, since investors project out the company's long-term expansion and use rates as a discounting tool. Higher rates cut into such firms' future profits and, in turn, their stock valuation.
It remains too early to tell whether the economy is entering a new expansionary cycle or starting the kind of regime change that only comes once every few decades, Jablonski told Insider. The kind of regime that materializes after the pandemic depends on just how much inflation the Fed is comfortable permitting, Jablonski said. The CIO said he expects price growth to crest at 3% during the recovery, but that surge is expected to quickly fade soon after.
The market's reaction won't come overnight. Asset classes that thrived in past regimes only started to decline well after relevant central banks lifted rates multiple times. The Fed's latest projections suggest its first post-pandemic rate hike won't arrive until after 2023, leaving plenty of time for the market to swing between regime-change positioning and a return to past year's norms.
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Transitory inflation 🆚 economic decline. Journalism based on hysterical hyperbole is not becoming.