Tom Graff, Head of Fixed Income at Brown Advisory and Sam Stovall, CFRA Chief Invest. Strategist, joined Yahoo Finance Live to break down the key takeaways from today's FOMC meeting.
ADAM SHAPIRO: And let's get some commentary now from Tom Graff, Head of Fixed Income at Brown Advisories, and Sam Stovall, CFRA Chief Investment Strategist. It's good to have both of you here. Let me start with you, Sam, because when we talk about the dot plot, one gets the impression they almost regret introducing this monster back in 2012 in an attempt to keep us all better informed.
But here is what really got everyone's nerve up. Seven now see a rate hike in 2022, and it was four in March. 11 of 18 see two rate increases by the end of 2023. So isn't that enough that we should be making decisions today about our investment strategies? Or is it an overreaction in the market?
SAM STOVALL: No, I think it certainly shows that that is the direction of the thinking, anyway, for inflation and that whether you hearken back to Edson Gould's three steps and a stumble or whether you just look to historical trends where you do find that energy, technology, materials tend to be the better performers in a rising inflationary environment, I think you do have to make some adjustments.
SEANA SMITH: Tom, what's your reaction to the reaction that we're seeing in the 10-year today? Because yes, it's moving higher. It's up five basis points. But we're still just at 155. Does that make sense to you?
TOM GRAFF: Yeah, actually, it makes total sense to me. And I actually think the way the Fed has communicated and the way Powell has communicated their intentions, it's perfectly with this average inflation targeting regime. And we were a little surprised that interest rates had fallen over the last month. Despite jobs being lower, Powell used this opportunity to sort of walk back his prior statement that he needed a string of million-plus jobs. So really, I think this is a reiteration of their focus on the price stability part of their mandate, as well as the employment part of their mandate.
ADAM SHAPIRO: But to follow up on that, Tom, I mean, it's not a time to try and reach hard conclusions about the labor market. And we all know, he even cited, what is it, 15 million Americans by September will lose all of the extended unemployment benefits. So what is he telling us, because investors make their decisions based on what he said?
TOM GRAFF: Well, I think he's just being honest. No one knows whether the apparent supply side challenges in labor are going to solve themselves when the extra pandemic-related unemployment benefits expire or whether there's something else going on. And he mentioned child care. He mentioned early retirements. We just don't know how large those two buckets sort of make up.
So I think-- I think he's doing what average inflation targeting is supposed to be about. He's letting the data tell them where to go. The data right now says inflation is pretty high. Some of it's transitory, but some of this wage inflation probably stays. And so I think this meeting was about creating some space to operate, not necessarily projecting a particular policy maneuver, but creating some space to maneuver.
SEANA SMITH: Sam, how is the market looking at the update that we got out of the labor mark-- or update from Fed that we got on the labor market? Because yes, there was some hesitation. There certainly is a lot of uncertainty over the next several months. But he was pretty optimistic when he talked about the job creation that he's expecting to see this summer and then, of course, into the fall as well.
SAM STOVALL: Sure. Well, I think that the Fed is basically saying we can see the trends. And what we expect is that a year from now the labor picture will be much, much brighter. What he didn't necessarily say was that the wage component is expected to be substantially higher. And that is a less transitory aspect of inflation.
So I think that the Fed had to acknowledge the upward trajectory of inflation, because in prior meetings, they seemed to be looking at totally different data from the rest of the Street. And so now, I think, they had to acknowledge what a lot of other people know. But the concern is that maybe things will just get too hot, and we will have to raise rates sooner rather than later.
ADAM SHAPIRO: So Sam, when we talk about raising rates, and I'm looking at the 10-year right now, it's at 1.56%, about 1.57%, we're seeing yields on short-term bonds also rise. Where's that money going? I mean, as investors, a lot of us are trying to figure out all right, I got to put this cash somewhere. I'm getting out of bonds, but I'm not going into equities. So where is it going, Sam?
SAM STOVALL: Well, right now it's actually sitting on the sidelines. We have been seeing an increase in cash reserves for investors, but also for corporations looking to put some of that money to work later on, but also realizing that inflation is going to be a concern and that would adversely affect their investment portfolios. So certainly one day does not give you good direction. And today, essentially all sectors were either flat or lower. So it means that investors, at least in the short term, are retreating rather than rotating.
SEANA SMITH: Now as we wrap this up, Tom, I guess your big takeaway from the meeting. And did you hear anything today that makes you change or makes you think twice about your projections when it comes to inflation or the speed of the economic recovery?
TOM GRAFF: No. I think the Fed has done a good job of sticking to the messaging that average inflation targeting is supposed to be about. And I think investors should listen. I think they should realize that there's no sort of floor that prevents bond-- bond yields from rising and bond prices from falling. And so we're-- we're pretty defensive in the fixed income market right now. And I think if the numbers keep evolving the way they are, and if Powell's right that the employment market is going to improve over the balance of the year, I think interest rates will probably keep rising.
ADAM SHAPIRO: All right, just want to let everybody know the NASDAQ just went positive as we've been talking about this. So perhaps people are exhaling and I don't want to say a sigh of relief, but letting calmer heads prevail. Got to say thank you to both of you for joining us today. Tom Graff, good to have you here as I lose my computer, but it was good to have you. Tom Graff is Head of Fixed income at Brown Advisory, and Sam Stovall, always good to see both of you, CFRA Chief Investment Strategist.