Federal Reserve (Fed) Chair Powell delivered exactly the right message for financial markets during Friday’s Jackson Hole speech. The S&P 500 Index reached another all-time high — marking its 52nd record close this year — and interest rates fell across the yield curve. Long Treasury Inflation-Protected Securities (TIPS) rose nearly 2.5 points with yields moving deeper into negative territory, close to historically low levels. Investors took comfort in Powell’s promise that despite the tapering of bond purchases likely to begin this year, liftoff from the zero-interest-rate level would be subject to a “different and substantially more stringent test.”
Powell’s dovish tone ran counter to messaging earlier in the week from numerous Fed officials, who appeared to be preparing markets for a faster timeline to policy normalization. The wide-ranging communication coming from Fed officials last week may be a sign of growing disagreement inside the Fed, as the pandemic continues to complicate the outlook for labor markets and inflation.
On the employment front, Powell still believes the Fed has “considerable remaining ground” to cover to reach maximum employment, especially with labor force participation well below pre-pandemic levels. While he continues to see slack in the labor markets, other factors would suggest full employment may already be at hand, with record-high job openings and quit rates, and employers struggling to find workers.
Chair Powell’s views on inflation also appear out of touch with views from other Fed officials who are not convinced the recent spike in inflation will be transitory. His statement on Friday relating to the Fed’s new average 2% inflation targeting framework was especially puzzling. The Fed chair remains committed to the idea that inflation still needs to be “on track to moderately exceed 2% for some time” despite trailing one-year Personal Consumption Expenditures Price Index inflation coming in at more than twice the Fed’s target. Average inflation targeting means there may be times when inflation needs to run below 2% to meet the target.
The abundant liquidity conditions created by the Fed’s easy money policies are likely to support asset prices over the near term, but the risk remains that higher inflation will force the Fed to react.
Tags: Federal Reserve | COVID-19 pandemic | Labor market | Inflation
< Go to Viewpoints
Disclosure Statement
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
 (1).jpg "Fed Chair Powell a Long Way From Liftoff Photo")
