In my view the FOMC meeting was largely a nonevent. The Fed left interest rates near zero and signaled it would leave them there through at least 2023. The Committee stated “with inflation running persistently below the 2% longer run inflation target, the FOMC will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.”

The above statement confirms the August 27 remarks it will inflation to overshoot their 2.0% target after periods of underperformance.

The Fed’s quarterly projections showed a slightly more upbeat outlook as compared to June. The central bank is now projecting a 3.7% contraction in 2020 as compared to a June estimate of a 6.5% drop. Growth is expected to rebound to 4.0% in 2021. The fourth quarter unemployment rate is now forecasted to be 7.6% vs 9.3% in June and 5.5% in 2021.

Regarding inflation, the PCE is now projected to rise by 1.2% in 2020 vs a 0.8% June estimate and 1.7% in 2021. Longer run fed funds rate was left unchanged at 2.5%.

Stepping back, I believe the new policy is extraordinary forward-looking guidance. The FOMC disclosed its aim of pushing inflation “moderately above 2% for some time” until the labor market essentially reaches full employment.

Based upon the above Fed projections, the unemployment rate needs to drop below 4.1% and the headline PCE inflation greater than 2.0%. before the Fed acts.

Bloomberg writes the above environment has only occurred 23 months since 1960. So in other words, the Fed is not going to act until the economy is near perfection.

Wow! What I think will be the immediate response is a steeper yield curve, a lower dollar and “volatility” in high PE growth stocks.

If yesterday is a harbinger of days to come, such an outlook is not perhaps prophetic as the NASDAQ declined about 1.25%, small cap value stock rose about 1.5%, the dollar fell and commodities and Treasuries yields rose.

Briefly commenting about yesterday’s economic release, the 0.6% rise in August retail sales was a bit weaker than expected but many are dismissing the data given that sales are already 2% above their pre-pandemic level.

The big picture is that the expiry of the enhanced unemployment benefits at the start of the month did not have the catastrophic impact on spending some were suggesting. The statistics suggest that real consumption remains on course to rebound by close to 40% annualized in the third quarter.

What will happen today?

Last night the foreign markets were down. London was down 0.47%, Paris down 0.76% and Frankfurt down 0.73%. China was down 0.42%, Japan down 0.67% and Hang Sang down 1.56%.

The Dow, led by the technology, should open moderately lower. Housing data and weekly jobless claims are released at 8:30.

Oil is about 1% higher on an influential report from the giant commodity trading firm Trafigura stating the lack of funding in the exploration and production companies leave the world with a “major problem” stating that the world needs to replace millions of barrels daily and supplies may fall considerably more than expected causing an expected rise in prices.

The 10-year is up 9/32 to yield 0.67%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.