Fed Chair Speaks in Cautious Tone Despite Tapering: 5 Picks

The Federal Reserve has finally announced its much-expected tapering of the ongoing quantitative easing program. On Nov 3, Fed Chairman Jerome Powell said in his post-FOMC meeting statement that the central bank will start reducing its existing $120 billion per month bond-buy program ($80 billion Treasury Note and $40 billion mortgage-backed securities), effective this month.

Despite adopting the first major shift from the ultra-dovish monetary policies that it initiated in March 2020, the overall tone of Powell’s statement still sounds dovish as he categorically delinked bond-buy tapering from the future interest rate hike.

Fed Remains Dovish Despite Tapering

The Fed has decided to reduce its existing bond-buy program by $15 billion per month ($10 billion Treasury Note and $5 billion mortgage-backed securities) later this month. At this rate, the quantitative easing program will terminate in June 2022. The gradual elimination of the monetary stimulus is a calculated move by the central bank to avoid a 2013 like taper tantrum.

Having initiated the tapering, the Fed chair said, “Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”

In this regard, Powell only slightly adjusted the Fed’s view on inflation from “transitory” to “expected to be transitory.” This clearly implies that the central bank is in no hurry to hike the benchmark interest rate from the current range of 0-0.25%. He also said that the Fed is ready to adjust the pace of tapering “if warranted by changes in the economic outlook.”

Wall Street Welcomes Fed’s Decision

Fed’s decision was mostly in line with market participants’ expectation. The central bank has injected this unprecedented monetary stimulus to maintain sufficient liquidity in the system to cope with unprecedented economic devastation owing to the coronavirus-led pandemic. The central bank has decided to gradually withdraw that stimulus as the economy has made sufficient progress.

Market valuation has already discounted the likelihood of the Fed starting to taper its monthly bond-buy program this month as the inflation rate skyrocketed to a 30-year high. Prolonged supply-chain disruptions, a labor shortage and massive pent-up demand are the primary reasons for the galloping inflation.

In fact, the dovish tone of the Fed Chair bodes well with the market. As a result, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — gained 0.3%, 0.7% and 1%, respectively. The small-cap-centric Russell 2000 advanced 1.8%.

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The current projection by the CME FedWatch shows a 9% probability that the central bank will hike the benchmark interest rate in early 2022. The Fed has maintained that a rate hike is unlikely before the second half of 2022. Moreover, Powell’s statement also signaled that the first rate hike may be delayed till late 2022.

Moreover, not all stocks will succumb to a higher interest rate. Even if the Fed changes its current projection, pushing up the market's interest rate earlier than expected, corporate bigwigs are unlikely to bear the brunt of a rising interest rate. These companies have a robust business model across the world and command globally acclaimed brand values. Their strong financial position will help them to cope with a higher interest rate.

Our Top Picks

Several good stocks are available for investment for the rest of this year. However, we have applied our the complete list of today’s Zacks #1 Rank stocks here .

The chart below shows the price performance of our five picks in the past month.

Nucor Corp. LOW remains well-positioned to capitalize on the demand in the home improvement market backed by investments in technology, merchandise category and strength in Pro business. Management is committed toward expanding the company’s market share and boosting the operating margin.

The company’s new total home strategy that includes providing complete solutions for various types of home repair and improvement needs bodes well. The strategy is an extension of the company’s retail-fundamentals approach.

This Zacks Rank #2 company has an expected earnings growth rate of 27.9% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 30 days.

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Written By: Zacks Investment Research