There may be a lot of disagreement with how the Federal Reserve is pursuing its current monetary policy, with inflation hawks becoming increasingly worried about extremely loose policy and its implications for the economy. But Chair Powell is not budging yet from the very gradual approach towards changes, which suggests an extended time of cheap money and further risk taking by investors.
Powell refrained from providing a detailed plan on how the Fed will kick off its tapering program. In his speech at the virtual Jackson Hole summit on Friday, he said the Fed had met the first of their two goals of average 2% inflation, while there’s clear progress towards the second goal for maximum employment. However, with the economy continuing to fight the impact of the pandemic, Powell warned against acting quickly to wind down monetary policy stimulus.
In effect, investors only got confirmation of what they already know. Tapering of the asset purchase program will start later this year, but this will be separated from interest rate hikes that normally follow when tapering ends. The test for the first Fed tightening of rates will now be “substantially more stringent” than that used for tapering. This message has clearly avoided upsetting financial markets, and as result we saw new record highs in equities and a slight drop in US Treasury yields and the US dollar.
The current environment remains positive for risk taking so we are likely to see fresh records being made in global and US stock markets. However, investors should keep a close eye on economic data which has recently surprised to the downside. Earnings growth definitely reached a peak in the second quarter but that hasn’t been enough to lead a pullback in equities. As long as bond yields remain depressed there are few alternatives to stocks. So, barring any surprises, I continue to be bullish on equities in the upcoming weeks.
The focus in commodity markets remains on Hurricane Ida. Oil prices hit a three-week high earlier today as the hurricane forced shutdowns in hundreds of offshore oil platforms in the Gulf of Mexico. Around 1.7 million barrels of oil output was lost on Sunday but given the pullback in prices during the Asian trading session, traders seem confident that output will be restored shortly. Later this week, the focus will shift to the OPEC+ meeting on September 1. Earlier this month, President Biden was urging OPEC to raise oil output to lower prices for consumers, but given the renewed lockdowns seen across Asia, the meeting was expected to be a non-event. However, the latest comments from Kuwait’s oil minister that OPEC+ nations need to reconsider the previously agreed increase of 400,000 barrels per day will make this meeting an interesting one.
