The Federal Reserve – the US central bank – gave its latest verdict on markets, monetary policy, and the economy last night. Some had been a tiny little bit concerned that the surprisingly good jobs data from last month would have blunted the Fed’s commitment to loose monetary policy.
Not a bit of it. Here’s Fed boss Jerome Powell, disabusing anyone of that notion: “We’re not even thinking about raising rates. We are strongly committed to using our tools to do whatever we can for as long as it takes."
So what does that mean for markets?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The Fed couldn’t have been any more dovish
The Federal Reserve was as dovish (ie, as committed to loose monetary policy) as it possibly could be last night.
Jerome Powell, Fed governor, made it very clear that its main focus is employment. “We’re tightly focused on our real economy goals and we’re not focused on moving asset prices in a particular direction at all.”
In fact, he went even further than that. In the Q&A after his video presentation, Bloomberg journalist Michael McKee put a few pertinent questions to Powell, asking – to paraphrase – how the Fed’s money printing might lead to capital misallocation, and potential higher inequality in the “real” world.
Powell basically argued that there’s no way that the Fed would hold back from stimulus simply because there was a concern that asset prices were too high. “We’re supposed to be pursuing maximum employment and stable prices, and that’s what we’re pursuing.”
To my mind, that’s pretty clear. Powell – like all his predecessors – is not in the business of worrying about bubbles. Indeed, if necessary, he’ll accept them as a side effect of keeping the economy going.
Now, my issue with this is that I don’t think it does keep the economy going. I think it’s extremely disruptive, and I think that one of the main reasons we’ve ended up in the present situation is that we’ve relied on central banks to paper over structural problems rather than addressing them head on. Serial bubble-blowing is not the basis for a healthy economy (or a healthy society).
But that’s a bit beside the point. What matters is not what I believe, but what Powell believes. He’s the man with his finger on the printing press. And because the Fed really only has two settings – pump money in or pull money out – then he’s going to keep pumping money in until people start begging him to tighten up. And that won’t happen until shop prices are rising at a rate north of 5% a year.
My colleague Merryn had a chat with hedge fund manager Hugh Hendry on the podcast the other day. Hugh is sceptical on the ability of the Fed to drive inflation higher. He echoes economist Richard Koo’s point that the Fed essentially has to convince investors that it is entirely irresponsible and couldn’t care less if inflation takes off. (You really should listen if you haven’t already).
The thing is, I’d say that Powell is going some way to giving the impression that he couldn’t care less. So maybe the whole “be less responsible” message is getting through.
Markets face two big risks now
So how did markets react? The tricky thing is, the market has come so far and the Fed has already been so dovish that it’s hard to give investors a big surprise on that front. There are only so many “big bazookas” you can pull out before it all starts to look a bit farcical.
That said, while the US dollar took a breather, it didn’t rocket higher (which is a good sign for the “risk-on”, bullish investor). And while markets paused somewhat, that’s not surprising given how far they’ve come in such a short space of time.
To me, there are two big risks now. One is that concerns about a second wave are mounting. We’ve seen new cases rising in Texas, Florida and California. That’s a big worry of course, because the V-shaped rally is based on the near-V-shaped recovery which has no chance of happening if we have to lock down again.
The other big risk is that European cooperation over the coronavirus fiscal rescue package collapses or results in a much less impressive deal than markets are currently hoping for. I think there may be a little too optimism baked in on that front for now, and I can see an upset on that front being a trigger for markets to take a deeper correction.
What should you do about that? Nothing you haven’t been doing already. As I’ve been saying for ages now, the main reason to understand what’s going on is so that you don’t get freaked out or panicked by events, which in turn means you stick to your plan and don’t do anything stupid.
So markets might well take a breather – or they might carry on regardless. But what I will say is that in the longer run (and when I say longer run, I really don’t mean decades – I’m thinking many months rather than many years) this will lead to inflation. I think the Fed’s statement last night merely confirms that I’m right to think that.
I’ve delved more deeply into why inflation is more likely to get traction this time, when it failed to do so post-2008, in the latest issue of MoneyWeek magazine, which is out tomorrow. Better yet I’ve suggested some funds and shares that might benefit from said inflation. If you’re not already a subscriber, I suggest you sign up to get your first six issues free now.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
Zoopla: Asking price discounts hit a five-year high – is now the time to buy a property?
News Zoopla’s October House Price Index shows sellers are accepting discounts of 5.5% on average to secure a sale – we reveal where homeowners are taking the biggest asking price cuts
By Marc Shoffman Published
Equity release rates drop – is it worth unlocking cash from your home?
News Lifetime mortgage rates are falling from their record highs - is equity release worth another look?
By Marc Shoffman Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published