Mr. Powell Comes To The Rescue

Capital markets are broadly higher this morning. Stocks gapped up following Federal Reserve Chair Jerome Powell’s widely anticipated speech in Jackson Hole. All eleven market sectors are in the green led by energy +3%, materials +1.3%, and communications +1.3%. Small-caps and emerging markets indexes are up 1-2% in early trading. Commodities soared as well; WTI crude climbed back to nearly $69/barrel, gold rose nearly 1% and copper continues to rebound from this past summer’s correction. Bonds, whether Treasuries or corporates or mortgage-backed are rising price (pushing yields lower).

By contrast, stocks fell roughly .5% yesterday with every sector group down save real estate. Safe haven Treasury bonds (and gold) caught a modest bid. The financial news media pointed squarely to a messy exit from Afghanistan as the proximate cause. But rising concern that the Federal Reserve will soon lay out a plan to gradually reduce stimulus is probably a bigger issue for capital markets. In recent days three different Federal Reserve Bank presidents have publicly called for near-term implementation of a plan to reduce the Fed’s $120 billion per month bond-buying program (called “QE”). Just to illustrate their views, I’ll pass along a couple of quotes. James Bullard said, “There is some worry that we are doing more damage than helping with the asset purchases because there is an incipient housing bubble in the US.” Esther George noted that “The economy continues to grow at a strong rate” and while Covid’s Delta variant “might slow down some of the returns to the labor market…I don’t expect at this point that it will derail the economy.” So one wants to reduce stimulus to avoid a negative outcome (home price bubble) and the other wants to do so because we’ve already achieved a positive outcome (strong economy).

This morning, some pressure was relieved when Mr. Powell delivered his much-feared address. First, he said the economy has substantially recovered from the Covid Crisis to warrant less government stimulus. The labor market has also made “clear progress.” Therefore, the Fed will likely begin reducing monthly bond purchases by stages before the end of the year. However, the next major push to reduce stimulus—interest rate hikes—won’t begin until QE has ended. So there’s no rush to raise rates. Regarding inflation, Mr. Powell reiterated his view that the post-Covid price spike we’re experiencing will be temporary. And he mentioned a concern we haven’t heard in a while, that the global disinflationary trend hasn’t been magically reversed. He is concerned about a continuation of the slower growth, slower inflation trend that materialized in the wake of the global financial crisis in 2008. There you have it, the Oracle hath spoken. In one stroke he petted down the ruffled feathers of traders fretting that the Fed would knee-jerk a response to rising US growth and inflation.

July’s Personal Income & Spending report served as confirmation that the US consumer is in good shape. Income growth accelerated more than expected, rising 2.7% from year-ago levels on the back of higher wages and advance child tax credit payments. And while consumer spending growth decelerated to 7.6% that’s still a very strong reading. The report’s inflation gauge—which is thought to be the Fed’s preferred inflation metric—was up 3.6% from year-ago levels. Bloomberg News says that “Whether the recent pickup in inflation is transitory — related to the reopening of the economy and supply constraints — or a more permanent trend has been a hotly-debated topic among investors, policy makers and economists.”