Powell React: Fed dovish stance affirmed

Powell sends a dovish message to markets

US stocks held onto miniscule gains following Fed Chair Powell’s dovish hold as investors await details of President-elect Biden’s stimulus package.  Depending on how this plan is pieced will determine if this stimulus will get a fast track or have to go through the reconciliation process.  The boosting of stimulus checks to USD2,000, expanding unemployment benefits and throwing everything at fighting COVID should receive much support from Republicans.  The Blue Wave does not solve all as state and local aid assistance will still require 60 Senate votes.

Wall Street seems committed in the short-term to continue with the big rotation into small caps and out of FAANG stocks.

Fed Chair Powell affirmed the Fed’s playbook and has tentatively put an end to any taper talk.  Powell’s comments at the Princeton Economic Webinar reiterated that the US is a long way from maximum employment and that the Fed won’t hike unless they see troubling inflation and imbalances.  The focus started with inflation, with the Fed Chair noting that a one-time rise in prices does not mean persistent inflation.  Other Fed members have already stated they need to see inflation above 2% for at least a year.

Given the fragility of the initial jobless claims and employment figures, Powell’s comments on getting back to a strong labor market should bolster the argument that the Fed’s next move could be yield curve control and not necessarily tightening.  Current policy is appropriate and forward-looking markets are eyeing the next move to be tapering bond purchases.  Powell said they will communicate “well in advance” of any tapering in asset purchases, also reminding us that they need to see clear evidence of substantial progress in their goals.  Powell probably bought himself several months of not having to address when they will be ready to discuss the idea of tapering.  The end of summer Jackson Hole Symposium will be a must-see event.    

Dollar weakness resumed following Fed Chair Powell’s dovish commitment and on nervous anticipation over Biden’s stimulus package announcement later today.

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