(MarketWatch) It’s here — the Federal Open Market Committee meets on Tuesday for a two-day meeting that is expected to end with lower interest rates and Federal Reserve Chairman Jerome Powell stating for the umpteenth time from the podium that no, President Donald Trump is not directing interest rates.
But let’s for a second take a longer-term view, and not whether the Fed can meet expectations or whether Powell will tank markets as he often does during press conferences.
MarketWatch’s Call of the Day comes from JPMorgan’s Asian equity strategy team, which points out the Fed is changing its so-called reaction function, which its in-house economists believe will result in a move to an inflation-averaging framework. That means the Fed will purposely let the economy overheat if inflation has been undershooting its target for some time. This isn’t just a Fed thing — the European Central Bank also is considering a review.
Okay, great, but what does that mean? Well, it should mean lower bond yields. Lower bond yields are not necessarily good news for stocks if that means lower growth expectations. But JPMorgan says that should the yield on the 10-year Treasury TMUBMUSD10Y, -0.43% average 2%, U.S. equities should trade an average valuation multiple of 20 times. “Thus, while typically we would assume that lower yields come with more downside due to lower growth expectations than upside due to re-rating, a structural step down in yields can actually sustain a higher average level of valuations,” the strategists say.
Growth stocks — because they are by definition long-duration assets — and yield stocks should benefit, the strategists say.
