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Fed blinks: Concerns about inflation and market weakness


As was generally expected by pundits, today the Federal Reserve (Fed) indicated future interest rate hikes will be dependent upon some stabilization in economic momentum, and softened its flexibility on the quantitative tightening program (also known as the reduction in the Fed balance sheet). Investors generally cheered the statement, with the S&P 500 finishing today at the highest price since mid- December. This was supported by lower bond yields, reflecting the Fed’s more dovish or “data-dependent” position on interest rate policy. We also saw a lower U.S. dollar, which supported non-U.S. asset prices.

It is not yet clear how long the Fed will remain “patient” on future interest rate normalization. During his press conference, Chairman Jerome Powell refused to state a specific time frame for this pause, focusing instead on the evolving economic and financial market data. We believe it is likely the Fed will be able to resume interest rate increases at some point this year if the stock market stabilizes and economic data improves. The Fed also continues to closely monitor actual and expected inflation trends in the United States.

We remain focused on the trend in economic data in the United States and globally. Our analysis indicates the global economy is on a path of a re-synchronized slowdown and odds of a recession also remain modest globally and low for the United States. We are maintaining our balanced assessment of risks between stocks and bonds, which is guiding our recommendation to hold stock and bond allocations close to long-term strategic target allocations. This reflects the higher levels of realized volatility across the global equity markets and the increase in interest rates relative to year-ago levels.

As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their unique situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. Indexes mentioned are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.


Important Disclosures

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U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

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