In every job that must be done
There is an element of fun
You find the fun and snap!
The job’s a game
(A Spoonful of Sugar, Richard Sherman / Robert Sherman)
Chairman Powell did it again. He has an uncanny ability to make even dour economic pronouncements palatable to investors, a skill that was put to work once again this morning. When those investors are predisposed to see all news as good news, his skill at dispensing economic medicine while maintaining a placid demeanor is embraced by investors. There were mixed messages in Mr. Powell’s speech today, and it is clear that the market is finding the Chair’s prescriptions quite easy to take.
For those readers who woke up late, Mr. Powell gave a 10AM (Eastern) keynote address to the (now virtual) Jackson Hole conference sponsored by the Kansas City Fed. The key takeaway appears to be that while he may be joining the consensus toward tapering the Federal Reserve’s bond purchases, he sounded less aggressive than his FOMC peers. Most importantly, he does not see the conditions that are necessary for interest rate hikes anytime soon. Markets do not want to think about rate hikes, and both stock and bond investors were encourage by him seeming to remove the link between tapering and hiking.
Much was made about Mr. Powell’s comments that inflation may indeed by transitory. This is another market-friendly sentiment. If inflation is transitory, it will soon pass. Whether it will pass quietly, like a ship in the night, or painfully, like a kidney stone, is of little consequence to most investors. As long as inflation is perceived to be a passing trend, policy makers have little need to tighten monetary policy to combat it. It will go away on its own. Or will it? The speech contained these potentially contradictory statements:
“Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2 percent objective over time.”
“We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment.”
It would appear that the market reconciles these statements with the rationale that when we see inflation above 2% it is transitory, but when we see it around 2% it is on target. That is a glass-half-full view of inflation, but one that is quite palatable to investors seeking continued economic strength. As I write this, we see the S&P 500 (SPX) and NASDAQ 100 (NDX) indices up about 0.8-0.9% and the Russell 2000 (RTY) up over 2.5%! Equity investors have become much more sanguine about a broad recovery that will help smaller, more economically sensitive companies. Yet at the same time, 10-year Treasury yields are 0.035% lower. Progress on inflation is outweighing the obvious discussion about how slowing bond purchases will affect their prices. There’s something here for everyone to like.
The title of today’s piece refers to a fictional character – Mary Poppins. One could suggest that the correct reference should have been Goldilocks. Traders view the economy as not too hot to cause a rate hike, but not too cold to cloud the situation. But markets that have become liquidity dependent were told once again in no uncertain terms that the pace of liquidity will slow. The timing and speed remain open for debate, but the discussion has switched from whether tapering will occur to when it will start. But that is of little consequence right now. The economic medicine was sugar-coated, and is going down quite smoothly.
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