Market Update – 23rd June 2021.

23rd June 2021

After last week’s hawkish ‘dot plot’ surprise from the US central bank, we said markets were getting way ahead of themselves as it was far too early to conclude that the current economic reflation is over and that we will see significantly higher interest rates in the coming years.

And thankfully common sense has returned this week, allowing global equity markets to reverse last week’s losses.

While the Fed is going to start “thinking about thinking about tapering” QE (its bond buying program), this is akin to simply removing your foot from a car’s accelerator.  Tapering certainly doesn’t mean stopping QE (i.e. putting your foot firmly on the brake pedal), let alone reversing QE (i.e. selling the bonds the Fed has previously purchased).

Consequently, the Fed is still going to be pumping massive amounts of money into the economy – it is just that its pace will simply be less than it is currently.

As a result, we believe that the Fed will keep monetary policy exceptionally loose for the foreseeable future and that the current low interest rate environment is the new normal:  interest rates are very unlikely to ‘normalise’ at 5% or 10% – and this would be very supportive for global equities.

Furthermore, while testifying before Congress yesterday (Tuesday 22 June 2021), the Fed Chair, Jay Powell, reiterated the Fed’s view that the current pickup in inflation was transitory and said that the Fed would be patient with any increases in US interest rates as he correctly downplayed the significance of last week’s dot plot:  as we have previously stated, the dot plot isn’t a Fed forecast, let alone a commitment.  It is simply the current views of 18 Fed officials, of which only 11 are Fed voting members – and the changes between the March and June dot plot clearly highlights that these 18 Fed officials like to change their mind about interest rates willy-nilly.

Our focus now turns to the Fed’s favoured inflation measure, the core PCE, which is released on Friday (25 June 2021), for signs if the current inflationary pressures are transient or sticky.

Investment Management Team