Come on baby, don’t fear the taper. (Apologies to Blue Oyster Cult.)

Stocks finished last week lower, amid fears that the Federal Reserve would soon start tapering its bond purchases. As I explain below, those taper fears are overblown.

Nonetheless, investors got rattled by the Fed’s more hawkish tone. The three major U.S. stock market indices posted big one-day losses on Friday. The Dow Jones Industrial Average plunged 533.32 points (-1.58%), the S&P 500 declined 55.41 points (-1.31%), and the tech heavy NASDAQ dropped 131.02 points (-0.93%). The Dow racked up its worst week since last October.

However, in pre-market futures contracts Monday morning, all three indices were trading firmly in the green. The bull case for stocks remains intact, although inflation readings are prone to trigger volatility. Looming large this week is the latest report on core personal consumption expenditures (PCE), scheduled for release June 25 by the U.S. Bureau of Economic Analysis.

Taking center stage last week was the latest meeting of the Federal Reserve’s policy-setting Federal Open Market Committee (FOMC). This FOMC confab was especially crucial because it came in the wake of the most recent U.S. consumer price index reading (CPI), which showed that the CPI jumped 5% on a year-over-year basis in May, the fastest pace since August 2008.

May’s 3.8% jump in the core inflation rate (which excludes volatile food and energy prices) was the sharpest increase in nearly three decades. Supply chain turmoil caused by the pandemic was a major culprit for the hot inflation data.

Wall Street freaks out…

In his public statement at the conclusion of the two-day FOMC meeting, Fed Chair Jerome Powell raised the central bank’s inflation expectations and unveiled a modestly more hawkish tilt.

I purposely chose the word “modestly,” because Powell really didn’t say anything earth-shattering. It’s his job to be fuzzy and he pulls it off admirably. But investors lost their cool anyway. As the following chart shows, stocks had a lousy week that was punctuated by Friday’s implosion.

Wall Street’s expectations leading into the FOMC meeting were for details on policymakers’ discussions on bond purchases and the introduction of a possible timeline for tapering those purchases. But Powell tamped down the taper talk.

Yada yada yada…

Tapering is the reduction of the rate at which the Fed accumulates new assets on its balance sheet under a policy of quantitative easing (QE). Tapering is the first step in the process of winding down an existing monetary stimulus program.

But in his remarks last Wednesday, Powell didn’t mention a specific taper timeline. He said the central bank is keeping an eye on economic data, it’s taking a wait-and-see approach on inflation, and it hasn’t made any decisions on ending bond purchases. As they used to say on Seinfeld: Yada yada yada.

One can reasonably surmise that Powell vaguely dismissed taper fears to remain consistent with the Fed’s view that inflationary spikes probably don’t signal the start of a multi-year trend of rising prices.

As expected, the FOMC left its benchmark short-term borrowing rate untouched at near zero. The so-called “dot plot” of individual member expectations pointed to two hikes in 2023, as opposed to the original estimate of 2024.

Although the Fed raised its headline inflation expectation for 2021 to 3.4%, a full percentage point higher than the March projection, the Fed stood by its view that inflation pressures are transitory.

A pause, not a reversal…

I urge you to keep in mind, rate hikes are still about two years away. Last week’s decline in stocks seems to be a consolidation, not a retreat, as the markets prepare for their next upward leg.

The Fed’s QE has reached historic proportions and should provide plenty of additional fuel for stocks to continue rallying this year (see chart).

The bull market is far from exhausted. According to the Fed, investors have until 2023 to worry about a rate hike. In the meantime, you can take comfort from history. Since 1990, U.S. large-cap equities have on average generated a total return of 18.1% during the two years preceding the initial rate hike from the Fed.

Which is not to say you should be complacent. Although inflation probably won’t reach runaway levels, it’s prudent to take precautionary steps to protect against inflation and possible economic setbacks.

Watch This Video: How to Hedge Against Mounting Risks

There’s a lot of noise in the media right now about inflation and monetary policy. But don’t overthink the cryptic utterances of bureaucrats in the Marriner S. Eccles Building. Focus on the fundamentals, which are overwhelmingly positive.

Corporate earnings and economic growth are surging. Consumers are eager to spend, a trend that’s likely to be confirmed by Amazon Prime Day, June 21-22. Underpinning these favorable conditions is the Fed’s overall monetary stance, which remains dovish. Don’t fear the taper, not for a long while yet.

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John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.