Hello everyone, to another Friday. Have you put the heating on yet? I considered it last night until my “Dad-side” demanded that everyone put jumpers on instead; some things never change. A bit like this blog; welcome to this week’s News, Views and Truths.
You may not know it, but yesterday hosted one of the biggest financial announcements in years. I have no doubt at all it passed you by as there was little to no coverage of this on mainstream media.
Yesterday saw Federal Reserve Chairman, Jerome Powell, deliver his speech at the annual Jackson Hole Symposium. To those readers who are unaware of what this is, the Jackson Hole Economic Symposium is an annual, exclusive central banking conference, held to discuss policy matters. Against the backdrop of the Coronavirus pandemic and the extraordinary fiscal policy measures that are being put in place globally, this was a highly anticipated speech.
And the decisions outlined will affect all of us.
Until formalised yesterday, the US Federal Reserve has seen inflation as its nemesis, which goes as far back as the 1970s and the introduction of Paul Volcker as the Federal Reserve Chairman. And understandably so; US inflation peaked at 14.8% in March 1980 and subsequently fell to below 3% by 1983. The tool available to them, which became the most effective weapon against rampant inflation, was interest rates, and the Federal Reserve did not hold back in raising these to spectacular levels.
The prime rate, which is the interest rate that banks use for both savings and lending rates, rose to 21.5% in 1981 and resulted in a recession due to the effects of high-interest rates on the construction, farming, and industrial sectors. This eventually led to a national unemployment rate of over 10%, but because inflation was under control, the policy was deemed a success.
The announcement yesterday laid out the measures for a complete reversal of this, with a focus on increasing the employment rate and allowing inflation to rise. To be fair, since the crisis of 2008, this has been an informal policy and for the past two years, the Fed has been undertaking a review which looks into lower potential growth and more depressed global interest rates.
The result of this is an evolution of the objectives of the Fed, including a goal for maximum employment and the flexible use of “average inflation targeting”. This enables monetary policy to “aim to achieve inflation moderately above 2% for some time” following periods when inflation has been below that level.
So what does that mean to you? In my eyes, it hard-wires the often-written belief that Central Bank’s intention is to keep interest rates lower, for longer. For the market, it confirms dovishness which is no longer data-dependent; liquidity will be ample and cheap.
However, inflation will rise. We have started to see this already and the Fed has now signalled that it is comfortable with letting inflation rise above the 2% target. This, combined with low-interest rates, is the perfect storm for deposit-based savings; if the writing was on the wall before, it has now been printed out and hand-delivered to your front door.
And again, regular visitors to this blog will know that inflation is a key element of our portfolio positioning, so I do sit here rather comfortably, knowing that we are in a position to offer our clients an investment offering with this particular hedge in mind. But it is not the capital inside our portfolios that I am concerned about for our clients.
Hence next week we will be inviting all of our clients to a webinar, which will be hosted by myself and my Co-Director, Corryn Wild, on September 23rd, focusing on the perils of cash savings and, in particular, Cash ISAs. Before yesterday, we were surmising on the forward path; now we know and now we can prepare. If you have a Cash ISA, you simply cannot afford to miss this. If you wish to get in touch beforehand, please do not hesitate to do so.
This week’s “When Andrew Met…” video is on the website here with Andy Brown’s update on the Baillie Gifford Japan fund. In this, we discuss how Japan has fared during the pandemic and how the Baillie Gifford team have managed the fund against the market backdrop. Spoiler alert: very, very well.
Once again, my weekly podcast is also live here, with this week’s guest being Jim Wright, manager of the Premier Miton Global Infrastructure Income fund. Jim is a true expert in his field and outlines his views on infrastructure opportunities, with a particular focus on the upcoming US Presidential Elections.
That is it for another week. Stay safe, stay warm and I shall see you all next week.