Powell’s wait-and-see speech reassures some investors
Federal Reserve Board Chairman Jerome Powell's wait-and-see approach in Friday's long-awaited address gives investors and market participants an extraordinary central bank to support the economy. Assets that have reassured us that efforts are likely to support the more risky ones will be a little longer.
In a comment to the annual, but this year's Virtual Jackson Hall Economic Conference, Powell said the economy continues to move towards benchmarking to reduce the Fed's pandemic era emergency programs, while raising interest rates. He said he was calling attention to the final decision.
Powell doesn't say anything about when he plans to cut back on asset purchases, other than saying that the central bank could be "this year."
Cathy Jones, Chief Bond Strategist at the Schwab Financial Research Center, said:
Equities rose after Powell's speech text was released, and the benchmark S & P 500 index hit a record high, but about when the US central bank could start pairing bond purchases. Government bond yields and US dollar depreciation due to lack of new hints.
Investors focused on the potentially imminent decision by the central bank to begin cutting $ 120 billion in monthly purchases of US Treasuries and mortgage-backed securities. Powell said he agreed with the majority of his colleagues that "this year" a bond "taper" might be appropriate.
Schwab's Jones said the Fed could announce a taper at the September meeting at the earliest if the August employment report scheduled for September 3 was strong, but weaker employment data was released. May be pushed up in December.
Jones added that in light of Powell's remarks and given the slow pace of policy changes, there is no reason for investors to adjust their position in the market.
"Apart from the big surprise, I think we'll continue to see equity performance, high yield bonds and investment grade bonds. These are all overpriced and could be perfect prices, but enough to change the trend. A signal from the Fed that they are trying to pull back. "
Rick Rieder, Chief Investment Officer of BlackRock's Global Fixed Income, said in a research note: .. "
For US Treasuries, Powell's message was "maintaining the status quo and monitoring data," according to Gennadiy Goldberg, interest rate strategist at TD Securities.
"In fact, next month's or two-month data will determine what the Fed will do," he said.
Roberto Perli, Global Policy Officer at Cornerstone Macro, said the hurdles for raising interest rates next year are high, given Powell's remarks, including "a number of reasons why inflation should be temporary."
"If the market eventually accepts Powell's outlook on rate hikes, the yield curve should rise a bit again," Perli said.
Treasury prices have risen, especially in the five- to seven-year part of the curve, according to Bank of America analysts, "indicating that the Fed has ongoing challenges to meet the criteria for rate hikes. "I'm reading Powell's comment.
The Fed has a three-part test to meet the criteria for rate hikes. The labor market should be consistent with the maximum employment rating. That inflation has risen to 2 per cent. And inflation has been on track for some time above 2 per cent. While the second condition is met-the Fed's inflation gauge has been above 2 per cent for several months-Powell has shown that meeting the other two conditions is not at hand.
"There are many grounds to cover to reach maximum employment, and over time we will know if we have reached 2 per cent inflation on a sustainable basis," Powell said.
For Jay Hatfield, CEO of Infrastructure Capital Management, Powell's words rarely confused the risk asset cart. Investors are safe to believe that the Fed is making a mistake in treating inflation as temporary and that it could ultimately hurt high-risk assets when it is corrected. It's not time to give up high-risk assets for shelter.
"We'll stay at the party until the punch bowl is actually taken away, but Uber is waiting outside," Hatfield said.
Source: www.thedailystar.net
