Powell keeps markets guessing
To no one’s surprise, the Federal Reserve held its benchmark interest rates between 0 – 0.25% and maintained asset purchases at $120 billion a month until “substantial further progress” was made on employment and inflation.
The Federal Open Market Committee Members are all in agreement that the economy continues to make progress towards these goals, but the Fed is nowhere close to lift interest rates.
I was expecting Powell to raise the alarm about the resurgence of new variants in coronavirus, but he did not seem too worried by the new mutations of Covid19 as people continues to learn how to live with the virus with each wave having lesser economic implications.
Market participants found Wednesday’s decision a bit confusing, especially that no timeline was provided towards tapering the central bank’s $120 billion of asset purchases. That’s why equities and treasuries couldn’t have any decisive move. However, the key takeaway from this meeting is the Fed will move in baby steps towards normalizing policy and won’t rush things out, as the spike in inflation is not yet a concern.
The ambiguous term “substantial further progress” suggests that tapering won’t likely to happen until early next year. Assuming it will take a year to end the program and another one to begin raising interest rates, we’ll continue to live in a low interest rate environment for the foreseeable future. While that is not the best environment for savers, insurance companies, and many pension funds, equity markets do thrive. As long as we do not experience an unexpected big shock, I believe we will continue to see new record highs for the US major indices.
Expect the US dollar to remain under pressure if risk sentiment continues to improve. The US currency is likely to be guided by the over all risk sentiment for the next several weeks. However, with real yields on US Treasuries falling to new record low around -1.20%, gold is becoming a necessity asset in many investors’ portfolios. So do not expect gold to be negatively correlated with equities performance.