Last week people had been assuming how the new policies from Jack Symposium are going to affect the market. Fed Chair Jerome Powell delivered a robust defense of the central bank’s monetary policy in the era of Covid-19 while acknowledging that it could reduce the pace of bond purchases toward the end of 2021.
PC: Seven Capitals
In his speech, Powell reiterated his objective to easy money as the US continues to convalesce from the novel coronavirus. His comments immediately helped push stock indexes higher and drive down the value of the U.S. dollar versus other currencies.
1. Jobs Are Recovering But Have Further to Go
Powell started his speech by indicating the extraordinary nature of the Covid recession: The downturn was exceedingly quick yet devastatingly deep which led 30 million people to lose their jobs in two months. This economic devastation was the reason why the Fed cut interest rates to near zero in March 2020 and began buying $120 billion of debt each month.
That recovery has been highlighted as well: In July alone, employers added nearly 950,000 workers and the unemployment rate fell to 5.4%. The pace of employment should only pick up in the months to come, thanks in part to everyday life returning to a semblance of normal and higher federal unemployment insurance ending soon.
2. Gold Prices Pauses At Higher Retreat
Gold prices stabilized after a sharp retreat on Thursday, taking a firmer dollar in its stride as investors looked forward to the U.S. Federal Reserve’s stance on tapering economic support at its Jackson Hole symposium. Spot gold rose 0.1% to $1,792.01 per ounce by 1:38 p.m. ET. U.S. gold futures settled up 0.2% at $1,795.20.Bullion slipped as much as 1.2% and below the key $1,800 mark on last week Wednesday as a stronger dollar dented its appeal.
Federal Reserve Chairman Jerome Powell appears to have successfully walked the tightrope of market expectations with his Jackson Hole speech on Friday, reassuring those who want the Fed to start reducing its monetary stimulus while placating those who don’t want a rate hike anytime soon. Powell said the Fed would start to taper its $120 billion in monthly asset purchases by the end of the year—not, as some have called for, in October.
The Fed chairman spent a lot of time explaining why he still thinks the current inflation number, which is relatively high at more than 4%, as the Fed measures it, will be transitory. He went into the weeds a bit to demonstrate how complex policymakers’ understanding of inflation is.
3. Skillful Move Before New Fed Appointments
But his successful tightrope performance may have pushed his re-nomination across the finish line. Reports are seeping out that the White House staff that is doing all the decision-making in the Biden administration has decided on a compromise—naming Powell to a second term as Fed chairman and Governor Lael Brainard, the only Democrat on the board, as vice chairman for supervision to replace Republican appointee Randal Quarles, whose term in that position expires in October.
This will keep those who think Powell is doing a good job happily and ensure continuity and stability in monetary policy in these still-troubled times. Naming Brainard to the supervisory post will put a proven regulatory hawk in that job and appease progressives who see Powell’s main defect as his negligence in reining in banks. Brainard, who first hoped to be Treasury secretary and then hoped to be Fed chairman, will presumably continue to be a trouper and be content with this lesser role.
The White House can then fill the open seat on the board with someone who is a certified progressive, and tilt it further in that direction by finding a suitable successor to Vice Chairman Richard Clarida, another Republican appointee whose term as governor conveniently expires in January.