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Hi everyone, this is Brian Nick, Chief Investment Strategist for Nuveen. Thanks very much for joining us here on LinkedIn live as I recap the just concluded FOMC meeting for the month of September. It was a newsy meeting, so let's get right to the details. First I'm going to summarize what the Fed did, what it didn't do, then we'll go into some of the market reaction as well as some of the other topics that we know are on investors' mind, and then maybe a little bit of a preview at the end of our fourth quarter outlook. Our Nuveen Global Investment Committee just met last week, so we still have a lot of fresh news and new twists and turns in our themes for the outlook for the remainder of the year into 2022. I mentioned that the Fed made a lot of news today.

That's because we got new forecasts from the Fed, a new dot plot showing their expectations for interest rates, not just over the next couple of years now, but now into 2024, which we now have forecasts for. Not sure how seriously we should take those this many years out, but it's interesting that we do get those this far in advance. The market reaction to the entire Fed news release today and the press conference from Jay Powell was pretty muted. The equity markets and the fixed income markets are basically where they started just before the meeting concluded and the Fed started releasing the information. That's probably a good thing if you're the Fed, the Fed probably feels comfortable with that, that they didn't make any big kind of market moving surprises and that their communication strategy on what his plans were heading into the meeting was clear enough that there was no big shocks delivered today when they actually announced their intention to, perhaps at the next meeting, almost certainly at the next meeting, start to wind down their asset purchase program, which has been going on for the better part of a year and has been absorbing $120 billion of treasury and agency mortgage-backed securities in exchange for ample liquidity into the markets, really since the end of 2020.

Let's talk about the taper. The Fed basically made one major change to a statement this month, which was to say that they expected, assuming everything went as planned and according to their expectations for the economy, they expected that they would soon be ready to moderate the pace of their asset purchases. Now that's Fed speak for, "we're going to announce at the next meeting that the taper is happening." Didn't give a lot of details in the statement about how quickly the taper would happen or what kind of benchmarks we need to see, but it sounded from Jay Powell's press conference as if there was general agreement that the taper would be about 15 billion per month. So lowering the asset purchase amount by that much per month until we get to about the middle of next year and the asset purchase amount would effectively hit zero.

The other detail from the report that Powell mentioned is that the taper is, again, is expected to be starting in the month of December, having been announced in November. And that Powell felt that even if the next employment report was just so-so, maybe right on expectations, or even a little bit below expectations, he still felt there was enough support on the committee to initiate that taper plan. So the bar for getting the Fed to taper is really not that high at this point, there's widespread agreement on the committee. And I would say an anxiety on the part of some members of the committee who wanted to get this started a long time ago to begin winding this down. The Fed didn't really make any other major changes to its statement.

It mentioned the impact of Delta, the COVID-19 variant on the progress on the outlook, and that was actually manifested pretty starkly in some of its forecasts, which I'll get to in just a second, but the fact that it really didn't change this economic assessment all that much since July, not many changes to the statement or its official kind of policy outlook beyond the expectation that the taper is going to be happening very soon. The Fed's forecast, which it releases new versions of four times a year, so this is the first time we're seeing that since June, they did have a revision down in GDP growth for 2021 from 7% to 5.9%. A lot of that is really just delayed growth that's going to happen next year instead of this year because of the Delta variant. So they actually raised their forecast for 2022 and 2023.

So growth a little bit lower than expected this year, but higher than expected next year, long road ahead for GDP growth on the cycle if you believe the Fed's forecast. We don't get really back down to normal economic growth, according to the Fed, until 2024, when they're forecasting 2% GDP growth. That's right around where they think potential growth is for the US. They actually also revised up their inflation forecast for this year. That's mainly because the inflation surprises that we've seen since the last set of forecasts was released were positive in nature. So they're really just marking to market essentially how high inflation's already been this year. Obviously the Fed, along with so many of us, have been surprised by the amount to which inflation has accelerated, largely because of the demand shock in the first half of the year, the positive demand shock with consumers getting extra stimulus and a lot of suppliers being caught off guards, not ramping up production enough to meet that demand with new supply.

They also revised up their forecast for inflation, though, for next year, which is a little bit more head scratching, a little more concerning, instead of 2.1% core inflation they now see 2.3% core inflation. That's actually, again, more like moderately above their 2% target than just slightly above their 2% target. So there's more members of the FOMC who are concerned that inflation is going to continue to run a little bit too hot for their liking into next year. Powell explained they think that's because some of the supply chain kinks that have not worked themselves out yet are going to bleed into 2022, but he expects they will eventually work themselves out as demand and supply equalize, but there's no doubt that that's having an impact on the degree to which the Fed or members of the Fed feel like they need to get on with raising interest rates maybe sooner rather than later.

A last bit on the forecast, the Delta variant, according to the Fed, is going to be preventing the unemployment rate from falling much further this year. They have a 4.8% year-end target for the unemployment rate. 5.2% is the current rate. They had previously said it was going to be four and a half, but they still have really optimistic forecasts, as do we, for how far the unemployment rate can fall in the next several years. So they have a three and a half percent forecast for the end of next year, same for 2023. So again, that's a pretty optimistic assessment, but I think it's consistent with what conditions were like before the pandemic hit. So the Fed's optimistic about its ability to get the economy back to that point a lot quicker this time around. Now, the dot plot, the most closely watched forecast, because it actually tells us what the Fed expects itself to do with interest rates.

We now have half of all the FOMC members expecting a rate hike next year, exactly half, nine out of 18. Last time it was seven out of 18. So that number has been inching up and we have more members now who expect multiple rate hikes next year, that was up one from the prior meeting. And if you go fast forward to 2023, virtually all FOMC members expect the Fed to be raising interest rates. I think there was one dot that says they're going to be at the zero bound, which means 17 of the FOMC members, 18 member body, think that they'll be raising interest rates certainly by 2023. And the median forecast for Fed funds rate by the end of that year is 1%. That means we'll see between three and four rate hikes by the end of 2023. We did get a new forecast for 2024.

The Fed thinks that the Fed funds rate will be approximately 1.75%, that's right around where it was before the pandemic. So maybe take until the end of 2024 to get all the way back to where monetary policy was prior to the onset of COVID-19. The Fed, by the way, thinks that two and a half percent is a neutral rate. So it still thinks it's going to be keeping monetary policy easy or looser than normal by the end of 2024. That's a really long runway that I think investors have in front of them where monetary policy is not going to be an impediment or a serious impediment to growth or to their success in achieving returns in their portfolios. Now let's zoom out a bit and talk more about the bond market. There wasn't much of a reaction in the longer end of the treasury curve today. We saw maybe breakeven rates of inflation inching down a bit.

We saw real interest rates inching up a bit, but the ten-year stayed really calm on the surface. And that's really been of a piece with what we've seen in the last several months. We haven't seen huge shifts in interest rates after big swings to start the year. We've been sort of range-bound in terms of what the tenure has been trading at assignment. Again, the Fed communication, I think, is breaking through and probably settling markets, keeping investors calm in a way that it wasn't at the beginning of the year with all the changes happening with the takeover of Congress by the Democrats, the stimulus bill, and a lot of uncertainty about how the Fed was going to handle all that along with the very high rates of inflation that we saw. Equity markets, again, finished the day, or are finishing the day, just about, where they were prior to the meeting.

So no net change. And I think the choppiness we've seen in the markets lately is not really because of the Fed. There's not a taper tantrum happening, markets are quite sanguine about the taper, but obviously we have other news intruding and kind of roiling the markets in an unexpected way. We had the news that continues to roll out about Evergrande, which is the Chinese real estate developer that is under pressure to make payments to its creditors it may not be able to make. And there's an anticipation about how the Chinese authorities will respond and support or not support Evergrande in terms of getting a restructuring, it's a pretty complicated process to do that. It's not a straightforward business in the way that most businesses are, obviously have been borrowing a lot of money to develop real estate for the last decade or more.

And again, we don't know exactly what the Chinese officials are going to do or not do, but we are pretty satisfied that this is not going to be a systemic issue with contagion that crawls out into the rest of the global marketplace. US credit markets, European credit markets have been very well behaved, not responding to this at all like it's going to be a domino effect. Fiscal policy uncertainty here in the US is also, I think, bothering markets just a bit. We have a real sort of labyrinth of fiscal challenges in the next couple of months, we have a debt ceiling expiration, or the treasury will hit its debt ceiling in mid-October. That needs to be raised or the US risks defaulting as we nearly did in 2011, got downgraded by standard reports for our troubles. There also needs to be a government funding package to keep the government open, to not have a government shutdown at the end of this month.

That seems to be inextricably also tied to the debt ceiling, which makes it more controversial as well. And there's these dual spending bills. There's a bipartisan bill that's waiting for passage in the House. There's the much more complicated and much larger reconciliation bill. That's going to be done on a party line basis that needs to pass both the House and Senate and be whittled down into something that can pass both the House and Senate. And those bills are inextricably linked as well. So there's a lot of fiscal mess to get through, certainly between now and Halloween and perhaps extending into November and December as well. I think the most important reason though, we've seen a little bit lower trajectory in equity market returns and a little bit of a pull back from all-time highs is really just because global growth is slowing and markets always have to process what it's like to invest in a world that's slowing down rather than one that's speeding up.

Now we're slowing down from an incredibly fast pace of growth supported by really white-hot consumer spending growth in the first half of the year. That was because of the stimulus. That was cause of the reopening. Those are one off deals. So inevitably, we're going to see the rate of consumption growth slow. Even if business investment picks up, even if global trade flows pick up, as they have, the consumer is just simply not going to be there moving forward in the way that they were in the first half of the year without all the stimulus and with a lot of the emergency provisions of unemployment and other measures expiring or set to expire. So that, I think that is the main reason why we're seeing a little bit more trepidation on the part of equity market investors. So we're watching these fiscal developments.

We're also watching, I think the most important data sets moving forward are the employment data released on a monthly basis in the US, the weekly jobless claims data, which would give us a sense of how many people are coming off of the unemployment rolls and perhaps finding gainful employment pretty quickly, and then the inflation data. And we'll get a piece of inflation data next week that will tell us about how far above target that number remains. But over the next several months, we'll continue to see a moderation like we did in August, perhaps takes the Fed hikes a little bit off the front burner as a source of concern for markets. One thing before I go, the fourth quarter outlook from Nuveen will be out in just a few weeks. We're going to call it past the peak, but still a way to go.

That'll be on our website sometime in the first couple of weeks of October. We retain a very positive overall outlook for the global economy and for most markets. We do think we're going to be encountering an increasing number of challenges, or rather maybe have a little bit fewer tailwinds at our backs in the second half of the year, as we move into 2022. Less of a one-way street for investors that it has been. I think you've already seen that in the equity markets in the later part of the summer. There are also, we think, fewer glaring opportunities in public markets for generating income. It takes a little bit more creativity, probably more of a willingness to take on illiquidity risk, where to move into alternative asset classes as a way of generating income and portfolios with interest rates still anchored at this very low rate.

And we think that both interest rates and stocks are likelier to rise than fall over the next six to 18 months, but the trajectory is going to be somewhat flatter than it has been today. So yes, higher interest rates, but not sharply higher and yes, higher stock prices, but again, not sharply higher. So that's it for me, look out for our fourth quarter outlook on in just a few weeks and join us again in November when we recap what I expect is going to be the announcement of the official taper of quantitative easing and the start of the wind down process and the normalization of monetary policy. I hope you'll join me then. Once again, I'm Brian Nick from Nuveen. Thanks very much for joining me.

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Video was filmed on September 22, 2021
Featured Speaker: Brian Nick, Chief Investment Strategist
Nuveen, LLC provides investment advisory solutions through its investment specialists.
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