CHICAGO / NEW YORK, Aug 27 (Reuters) – Federal Reserve Chairman Jerome Powell’s wait-and-see approach in an anticipated speech on Friday reassured investors and market participants that the central bank’s extraordinary efforts to prop up the economy were likely to be riskier To support plants for a while longer.
Commenting on the annual but this year virtual business conference in Jackson Hole, Powell said the economy continued to make progress towards benchmarks for reducing the Fed’s pandemic-era emergency programs, while signaling caution on any decision to hike rates . Continue reading
Powell gave no indication of when the central bank plans to cut its asset purchases other than that it could be “this year.”
“We’ll probably have very loose politics for another year, and that’s good for risky assets,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
Stocks gained ground following the release of the text of Powell’s speech, with the benchmark S&P 500 (.SPX) reaching a record high, led by the lack of new evidence as to when the US Federal Reserve is likely to begin reducing bond purchases that the Treasury Department’s bond yields and the US dollar are falling. Continue reading
Still, some warned of the potential for more volatility in Treasuries around the close of the market, with more than 2 million options in 10-year futures contact expiring on Friday in September, said Charlie McElligott, managing director, cross-asset strategy, global Equity derivatives, at Nomura Securities International Inc.
Investors had been focused on a possibly imminent decision by the central bank to reduce their monthly purchases of US Treasuries and mortgage-backed securities by $ 120 billion. Powell said he agreed with a majority of his peers that a “taper” of the bond “this year” may be appropriate.
Schwabs Jones said the Fed could announce a tightening as early as its September meeting if the September employment report for August is strong, although weaker-than-expected employment data could postpone the announcement until December.
Jones added that given Powell’s remarks and the slow pace of political change, she saw no reason for investors to adjust their market positions.
“Aside from some big surprises, I think you’ll still see the performance of stocks, high yield, investment grade bonds – they may all be high priced and rated for perfection, but I don’t think we’re getting a signal from the Fed that it will pull back enough to change the trend, “she said.
Rick Rieder, chief investment officer of Global Fixed Income at BlackRock, said in a research note that although “every nuance of the chairman’s speech is analyzed for further evidence regarding the central bank’s plans to reduce asset purchases … here exaggerated.”
STATUS QUO AND VIEW THE DATA
For US Treasuries, Powell’s message was “monitor the status quo and the data,” said Gennadiy Goldberg, interest rate strategist at TD Securities.
“Really, the data for the next month or two will determine what the Fed will do,” he said.
Roberto Perli, head of global policy at Cornerstone Macro, said the hurdle to a rate hike next year was high, given Powell’s remarks, which “contained a litany of reasons why inflation should be temporary”.
“If the market finally accepts Powell’s prospect of rate hikes, the yield curve should rebound somewhat,” said Perli.
Treasury bond prices, particularly in the 5-7 year portion of the curve, rebounded in what Bank of America analysts saw as the market reading Powell’s comments “as indicating ongoing challenges for the Fed will reach their rate hike thresholds “.
The Fed has a three-part test for reaching the threshold for a rate hike: the labor market must match ratings of maximum employment; that inflation has risen to 2%; and inflation is well on its way to moderately above 2% for some time. While the second condition is met – the Fed’s inflation rate has been above 2% for several months – Powell indicated that the other two conditions would be far from obvious.
“We still have a lot to do to get maximum employment and time will tell if we have sustained inflation of 2%,” said Powell.
For Jay Hatfield, chief executive officer of Infrastructure Capital Management, Powell’s words did little to upset the risky asset wagon. While investors believe that the Fed is making a mistake viewing inflation as temporary and could hurt riskier assets if it corrects itself, the time has come to ditch riskier assets for safe havens.
“You’re staying at the party until the punch bowl is actually taken away, but your Uber is waiting outside,” said Hatfield.
Reporting by Karen Pierog in Chicago and Saqib Iqbal Ahmed in New York Additional reporting by John McCrank in New York Editing by Megan Davies and Matthew Lewis
Our standards: The Thomson Reuters Trust Principles.