The Federal Reserve's move to accelerate its taper but not yet move the needle on interest rates has left market analysts in disagreement over whether it was the right call and how it could impact stocks.
Here's what five of them told CNBC following Wednesday's decision:
Mona Mahajan, senior investment strategist at Edward Jones, expected a market rotation:
"This doesn't provide much airspace for some of the higher-valuation stocks and more speculative asset classes broadly, so we think this is the start of an interesting rotation under the hood. ... We certainly are on board with the fact that we'll probably get one leg higher in the value cyclical rotation, especially if we do get a reopening 2.0 at some point next year, but we also think those defensive assets, not only are they a little bit more defensive as the Fed's raising rates, they also have pricing power, which is important. So areas like staples, like health care, even parts of utilities, in an inflationary or higher, elevated inflationary environment, they have pricing power and they have room for catch-up. And one final note I'd make — the terminal rate of this Fed ... is very important, I think, not only when they start raising rates, how far do they take it? And we've seen lower peaks on the Fed's terminal rate in history, so last two cycles, 4.25%, 2.25%. It looks like the Fed has baked in, for 2024, 2.1%, so a much more digestible terminal rate for the broader economy overall. I think that'll be viewed positively as well as the markets start looking towards that direction. So some rotation under the hood, but generally, a Fed that probably is a little bit more accommodative for the overall economy."
David Kelly, chief global strategist at JPMorgan, said the Fed should have also sped up its rate-hike timeline:
"I think it was entirely appropriate to accelerate this taper. We have substantially lower unemployment than they thought back in September. We've also got substantially higher inflation. I don't agree that the omicron variant or the current wave of the pandemic is actually inflationary because I don't think it's going to affect supply chains that much. I think the supply chain issue will gradually fix itself. But we do have stronger underlying inflation. It's inappropriate for the Federal Reserve to be keeping rates this low given that we're well above 2% inflation, and, of course, they're continuing to foment asset bubbles. And I think this is something that the Fed really should think about. You don't want to just push asset prices higher and higher and higher on the back of zero interest rates. So I think it's appropriate that they're tapering and I hope that by the middle of next year they do begin to raise the federal funds rate."
John Bellows, Western Asset Management portfolio manager and research analyst, said the Fed would likely undershoot its rate-hike target in 2022:
"I think it's interesting that the market's priced on top of the Fed for 2022. It has about three rate hikes. The Fed's now at three rate hikes. And so as an investor, you kind of have to say, 'Well, where are we relative to the Fed?' And my guess is that Jerome Powell is going to be pretty careful not to overcommit to those three rate hikes next year. The reality is that when they're ready to start thinking about hiking rates in March or certainly by June, we're going to have a much different inflation and growth environment than we do right now. We're going to see some moderation of inflation. The growth numbers are unlikely to be sustained at what we saw previously. You already saw a little bit of that in [Wednesday's] retail sales number, which was disappointing. And so I think Powell's going to not overcommit. And so as an investor, the market's priced on top of the Fed, and I think you need to think about that because it seems to me that if we're in a different environment next year, the chances are they undershoot in terms of rate hikes. Now, undershooting in terms of rate hikes, if that's in the environment of still-strong growth, isn't necessarily bad for risk assets and for credit and for other spread sectors and fixed income. But that's the type of exercise. Where is the market, where is the Fed, and then where are the risks relative to that? And again, if we're right that the environment is much different next year in terms of growth and inflation, I think the risks are probably on the downside in terms of the rate hikes that they deliver."
Former Fed governor Frederic Mishkin said waiting to raise rates could come back to bite his former employer:
"I think that they are being cautious in terms of still being pretty expansionary. I think the Fed is behind the curve and they are starting to signal that they do have to raise rates, and that's a good thing. The communication has improved in that regard. But the reality is that inflation is much higher than they anticipated, it's more permanent than they anticipated, and I think it's actually a mistake to not be preemptive at this particular stage, to say that we're not going to actually raise rates until we see the whites of our eyes, which is that we are at full employment. ... That may be too late because I think there's actually good reason to think we are already at full employment. So I do worry very much about what the Fed is doing. I don't think that it's going to be a disaster, but I think eventually they're going to have to raise rates by more than they otherwise would to contain this inflation. Inflation is going to be higher than it otherwise would and that's not a great outcome."
Delancey Wealth Management founder Ivory Johnson said inflation has likely already peaked:
"Anytime you see shipping container costs increased by 300%, those costs will be transferred to the consumer. Let's not forget the money supply's increased from [$]15 trillion to [$]21 trillion and demand for credit hasn't kept pace. That's also inflationary. But if you look long term, demographically, baby boomers are starting to retire. That's deflationary. Innovation and technology — that's deflationary. So I think we have already peaked, and if you look at the [Merrill Lynch Option Volatility Estimate] index — that's the bond market volatility — that's showing us that inflation's kind of peaked out. So I'm comfortable on that stance."
Note: The Merrill Lynch Option Volatility Estimate is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.