Friday's Market Minute: Key Takeaways From The FOMC And GDP

The Federal Reserve stayed on message and was suitably dovish at its latest FOMC meeting. There were a few subtle changes to the language of the FOMC statement and in Chairman Powell’s post-meeting remarks. The committee reaffirmed it wants to observe substantial progress toward its dual mandate on employment and price stability, including assurances that the worst of the pandemic is behind us, before scaling back accommodation. One notable difference was the acknowledgment of a strengthening labor market.

The initial market reaction was most noticeable in currency markets as the U.S. dollar fell. Equities continued to exhibit short-term “buy the rumor, sell the fact” price action and U.S. bonds firmed slightly. With improving labor market trends, the risks of a sudden upward repricing in yields are increasing and may unveil some unpleasant surprises at times as we move into the summer. Nevertheless, from a theoretical point of view, we can assume whatever the market is pricing yields at right now is the correct market price. Since prices deflated in the second quarter of 2020, the annual inflation rate will naturally move transitorily higher. However, once these comparative base effects are exhausted, cyclical, structural, and monetary conditions should normalize the inflation rate by year-end.

The increase in first quarter GDP reflects the continued economic recovery, reopening of public establishments, and continued multiplier effects in response to pandemic stimulus. The inflation and annualized seasonally-adjusted 1Q GDP number was up 6.4%. Robust highlights include disposable personal income up $2.36 trillion, or 67.0%, and personal consumption expenditures, which rose 10.7%. Personal savings as a percentage of disposable personal income was 21% compared with 13% in the fourth quarter of 2020. As such, one can infer that not all stimulus money was spent as the higher savings rate reflects precautionary demand for money.

Altogether, the U.S. economy is going to enjoy a few more months of tremendous data releases on vaccinations, stimulus checks, and pent-up consumer demand. The second half outlook is up in the air, but for now, everyone seems optimistic about this unquestionable wave of economic growth.