Week in Review: March 19, 2021

Markets generally ended the week lower as investors continued to keep a wary eye on interest rates, which gained another 0.11% as measured by the 10-Year Treasury yield. With the continued upward movement in rates, the “2-10 spread”, the difference between the 2- and 10-Year Treasury yields, now stands at 1.57%, the highest level since July 2015. A larger spread is generally interpreted to be positive for future economic growth.

In advance of its March meeting, some investors thought that the Fed might shift its stance on monetary policy, if only slightly, to acknowledge the recent rise in rates. Instead, the Fed chose to reiterate its commitment to current monetary policy. That stood in contrast to the ECB and Reserve Bank of Australia, both of which increased bond purchases in recent weeks in an effort to temper rising rates.

Updated economic projections provided by the Fed showed that it now expects GDP growth to accelerate to 6.5% in 2021, up from its 4.2% projection in December. The Fed also increased its estimate for core PCE inflation in 2021 from 1.8% to 2.2%. And while a couple of members now expect the Fed to raise rates before the end of 2023, not enough increased their forecast to change the overall expectation that the Fed is unlikely to raise rates before then.

In another sign of the Fed’s confidence in the recovery, it announced the end to looser capital requirements for large banks. The measure, taken last year, is now seen as unnecessary following the stabilization of the Treasury market.