Fed Chairman Jerome Powell quietened the market with just two words on Wednesday: “Not yet.” Powell’s comment sent yield on the 10-year Treasury bond tumbling and helped equity markets in US and Europe to recover from deep red to green. The US indices ended in the green, while the US dollar slumped over 0.5 per cent.
“Not yet” to the expectation that the US Federal Reserve have to move earlier than expected to taper its bond purchases and consider interest rate hikes. “Tapering” is the gradual reversal of a quantitative easing policy implemented by a central bank to stimulate economic growth.
“Until we give a signal (on tapering), market should assume we are not there yet,”Powell
Powell learnt and didn’t let history repeats itself like Bernanke’s tapering statement in May 2013 which frightened the markets.
In the recovery that followed the 2008 financial crisis, stocks and bonds both produced outstanding returns despite economic growth that was well below historical norms. The consensus was that Fed policy was the reason for this disconnect. Essentially, Quantitative Easing (QE) is a monetary policy tool in the Fed’s toolbox to stimulate the economy that will be rescinded gradually, or tapered, once the objective has been met.
Will inflation raise its ugly head in the coming months? Powell, doesn’t think so. The Fed has decided to hold interest rates steady and expects any uptick inflation in the coming months to be largely transitory.
It seems that the Fed will not move only on the basis of forecasts, and will instead wait for actual data to show that the economy is returning to pre-Covid-19 normal.
The End of Quantitative Easing. “Not yet”. The end of QE would be a positive sign for the United States, as it would have indicated that the Fed had enough confidence in the economic recovery to withdraw the support provided by QE.
Whilst global economic activity has been crippled by the impact of Covid-19, the financial markets are at their historic peaks. There is a disconnect between the performance of global equity markets and economic fundamentals. Why? Quantitative easing by central banks.
So are we ready for stable economic environment where the price of assets mirrors their underlying value?