Jackson Hole may be virtual, but investor anxiety still exists

Federal Reserve Update

Throughout the year, or even longer, investors have a big worry. What if the Fed did something stupid?

Given that the Central Bank of the United States is a solemn organization filled with people who know what it is doing, what if it never goes that far, but someone accidentally said something stupid?

The annual gathering of central bankers in Jackson Hole, Wyoming this weekend (think Davos without politicians or followers) always has the potential to give some bankers the opportunity to make some embarrassing explanations.

these years Virtual event Provided a major hint for Federal Reserve Chairman Jay Powell that he might stop the emergence of monetary stimulus measures.

“Stupidity” is of course in the ears of bystanders. Reasonable people can argue about the pros and cons of radical rate cuts and super-scale monetary stimulus, and whether they will make things better or worse.

Even bankers—not usually the cutest creatures—recognize that the generosity of the central bank’s kindness may increase economic inequality by increasing the value of wealthy people’s assets.

But the fund managers responsible for managing other people’s funds know that if the Fed – except for the nominal global central bank – were to vigorously withdraw the monetary support it had provided since the pandemic last year, it would make the Fed feel uneasy. Bond Market. This change will definitely have an impact on the value of other assets. At least for portfolio managers, this seems like a stupid idea.

Former Fed Chairman Ben Bernanke hinted that when support was unexpectedly withdrawn in 2013, the memory of the shock of “shrinking the panic” remained to a large extent. It is worth noting that few investors believe that excessive easing is wrong. On the other hand, tightening and cracking down on the stock market are called “policy errors” in the chin circle.

People have a strong sense of anticipation for Powell’s speech. Of course, on the dog days in August, although most wise people in the northern hemisphere are on vacation instead of staring at financial data terminals, the transaction volume is low anyway. At least for the US and European stock markets, they are far below average.

As in the past, the barometer of major US stocks such as the Standard & Poor’s 500 Index and the Nasdaq Index has been setting record highs after setting record highs this year. Even so, Jackson Hole has been looming on the market for months. This is an obstacle that must be cleared by those who are worried about policy tightening.

On Friday, the big day finally came. Like other participants, Powell spoke remotely. The event was transferred to the Internet a few days before it started. This is enough to curb expectations of a radical change in policy. If the threat from the Delta variant might force such an event to happen online, then this concern will encourage the Fed to be cautious about raising interest rates.

Finally, although other Fed officials discussed in unison the benefits of withdrawing from the stimulus program relatively quickly, Powell chose a safe routeHe painted a picture of a recovering economy and strongly hinted that the Fed may begin to withdraw its stimulus measures this year. But he also spoke diplomatically about the dangers of taking premature action.

He said that quick response “may do more harm than good.” “Untimely policy initiatives have unnecessarily slowed hiring and other economic activity and kept inflation below expectations. Today, as the labor market still has a lot of idleness and the pandemic continues, such mistakes can be particularly harmful.” No wonder the United States. The stock price rose as a result.

He mysteriously added: “There is no substitute for careful attention to incoming data and changing risks.”

So what does this leave us? It is possible to return to the position before Powell spoke. This insecurity of acting alone is something investors have learned to endure, and some people are more reluctant than others.

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, said that given the distorted nature of economic data, inflation and everything else since the first pandemic lockdown, Fed officials have learned Humility.

“There are hundreds of economists in the investment industry analyzing data, but in the end, when the Fed creates a narrative, the market will take it seriously,” he said. “But now, the Fed is actually saying,’We are in the same camp as you, focusing on the data. We have nothing special.'”

Ahmed said that this will allow the market to follow the ebb and flow of the bond market at will for a period of time, or even a few years. “At some point earlier this year, [bonds were falling and] Everything is “inflation is coming and it will destroy everything”. Two weeks later, everyone was talking about deflation. There is no mainline narrative yet. “

Officials will continue to disagree with each other, usually politely, but sometimes it may be more acrimonious. Data releases will continue to provide reasons for reducing stimulus measures one day, and then adding more stimulus measures the next day. Powell did not feed the market on Friday, and the Fed will not feed it again for a period of time.

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