Investors will be zeroing in on the Federal Reserve’s monetary policy meeting next week as a “Goldilocks” market environment that has helped lift stocks to record highs and tamed a bond selloff is tested by rising inflation.
Stocks have climbed steadily in recent weeks and now stand at fresh records, extending a rally that has seen the S&P 500 (.SPX) gain 13% this year and nearly 90% from its March 2020 low. U.S. government bonds have also rallied after their first-quarter selloff, with the benchmark 10-year Treasury yield , which moves inversely to prices, recently at 1.46%, some 30 basis points below its first quarter highs.
Some of those gains have been predicated on the Fed’s assurances that rising inflation will not last long enough to warrant a sooner-than-expected end to easy-money policies. Signals that the Fed is growing less confident in those assumptions could unsettle stocks, which have benefited from quantitative easing, and hurt bonds, as rising prices erode the value of longer-dated debt.
Investors “are going to be looking for signs that the Fed might believe that inflation is more permanent,” said Michael Arone, chief investment strategist for State Street Global Advisors.
The Fed has maintained that it has the tools to deal with accelerating inflation. The central bank may open discussion at the Tuesday-Wednesday meeting about when to begin unwinding its $120 billion per month purchases of government bonds, though most analysts don’t expect a decision before the Fed’s annual Jackson Hole, Wyoming, conference in August. read more