Hello, everyone and welcome to the start of another week. As the world’s economy reopens, there are plenty of topics to discuss and so, with enthusiasm, let us kick off this week’s News, Views and Truths.
The big news last week, which has rattled the markets, was the Federal Reserve Open Markets Committee’s (FOMC) June meeting where it began to signal their view of the economy and their plans with regards to interest rates.
Although, as widely expected, the Central Bank kept both interest rates and its asset purchase program unchanged, the bigger news that grabbed the headlines was that its inflation forecast was adjusted to a much higher figure, to 3.4% (from 2.4%) and, in turn, increased the growth outlook to 7% from the previous 6.5%.
In a divergence from previous meetings, where the questions on when interest rates would increase were consistently met with “data dependent”, this has now changed. It conveyed a different tone and started the clock with a rough timeline for increasing rates, with two rate hikes set for 2023. They also acknowledged that they have begun to “talk about talking about tapering”, with many analysts believing that we could see some tapering as soon as March 2022, with a series of two rate hikes in 2023.
However, any “tapering” of asset purchases will be carefully judged and will have little resemblance to the “automatic pilot” approach that the Federal Reserve employed seven years ago when attempting to tackle their loose fiscal approach, according to St Louis Fed President, James Bullard.
“This time around, I mean look at this data,” he said in an interview on CNBC. “Look at how outsized all these numbers are and how volatile everything has been. I think we’re going to have to be more state-contingent than we have been in the past.”
Whatever the approach, talk of tapering has brought uncertainty to the market and, as we all know, the market abhors uncertainty.
US stocks had their biggest daily decline in over a month on Friday, capping a rather turbulent week as investors continue to recalibrate their expectations for both inflation and interest rates. These declines extended over the weekend, with Asian markets also reacting to the FOMC minutes. The Japanese Nikkei 225 closed down 3.43%, with the Honk Kong Hang Seng index dropping 1.35%. The broad MSCI Asia Pacific ex Japan index fell 1.34% overall and set the scene for the European market opening down, with the FTSE down 0.86% at the time of writing.
This knee-jerk reaction to a potential tightening of monetary policy in the future is not surprising. However, it should not dissuade investors from looking at the markets in a favourable light. Most economies have not fully reopened and, as such, significant investment opportunities persist. In fact, the discussion of tapering must be viewed as a positive, indicating robust economic growth and the ability for the economy to be removed from monetary life support.
This, however, is a long way off.