Powell Soothes the Markets

June 28, 2021

Last Week in Review: Powell Soothes the Markets

This past week home loan rates improved slightly as Fed Chair Jerome Powell was on Capitol Hill sharing the Fed’s midyear economic outlook. Let us break down what the Fed Chair said, since his words also pushed stocks higher with the NASDAQ reaching all-time highs.

“Long Way to Go on U.S. Economic Recovery”

The Fed could not be clearer than with this line. IF the economy has a long way to go to recovery, THEN the Fed will not be hiking rates anytime soon and will also not likely taper bond purchases in the near future.

Recent economic readings have shown some signs of weakness and a recent report showed over 9 million job openings. The Fed has a dual mandate of maintaining price stability (inflation) and promoting maximum employment. On the latter mandate, the economy is coming up short, and this gives the Fed cover to not raise rates.

“I Have a Level of Confidence in the Prediction of Transitory Inflation.”

The financial markets appear to agree with the Fed. The 10-year note yield at 1.48% is certainly not worried about inflation right now. We will not find out if higher inflation is transitory until later in the year, or even next year, and Powell reiterated this by saying, “It may take some patience to see what is really happening,” or as Axl Rose sang, “All we need is just a little patience.”

On the inflation front, we all must hope the Fed is correct about high inflation being temporary. Persistent and high inflation is devastating to an economy. Outside of supply chain bottlenecks, which have caused high prices in items and appear to be somewhat temporary, there are components of inflation that appear to be “sticky” and less temporary, like wages and housing. We shall find out if the Fed will get it right. Powell did say it’s, “Very, very unlikely the U.S. will suffer 1970’s type inflation.” For the moment, bond markets and rates seem to agree.

“Optimism About the Path of the Economy and Strong Job Creation”

Recent job creation numbers have been reported beneath expectations, which again gives the Fed reason to hold rates near zero while continuing to purchase bonds.

Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This program is now in jeopardy, should economic data come in stronger or hotter than expected. 

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