Federal Reserve chair Jerome Powell’s announcement on the gradual withdrawal of the central bank’s economic stimulus has already evoked a response from investors.
Wall Street rebounded from losses while European stocks rose after a quiet day on Aug 27 post Powell’s much-anticipated speech at the Jackson Hole central banking symposium.
Meanwhile, gold prices jumped by 1.35% while that for silver was up by 2.17% in Asia, Avtar Sandu, a commodities analyst at Phillip Futures writes in an Aug 30 note.
He adds that the move comes as Powell reinforced that it would be appropriate to begin tapering bond purchases by the end of the year.
The Fed chair had also drawn a line between asset purchases and interest rates, saying that the central bank would not be in a hurry to increase rates after it starts tapering its US$120-billion-a-month bond buying programme.
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Powell’s speech had a dovish tone and has eased prior concerns of tightening in monetary policy to combat inflation.
However, Sandu points out that the chair has “left the door open on concerns over the rapid spread of the Delta variant, preferring to be non-committal as to things and rather rely on incoming economic data releases”.
Powell’s comments come amid debates by the FOMC (Federal Open Market Committee) over whether or not to start slowing down the pace of asset purchases.
“Today, with substantial slack remaining in the labour market and the pandemic continuing, such a mistake could be particularly harmful,” the central bank explained.
“Powell’s warning hints at a more cautious approach to pulling back on its policy, as some members of the policy-setting FOMC start to call for slowing its asset purchase programme,” mulls Sandu.
Going forward, the Delta variant – in Powell’s words – presents a near-term risk to economic growth. However, he is optimistic of an economic recovery.
Signs of a recovery are already evident with hiring firms scrambling to fill a record 10.1 million job openings at of June. While 6 million remain unemployed, Powell notes that the numbers will eventually go down as vaccinations rise, schools reopen and the extra unemployment insurance expires.
Of greater concern to Powell is rising inflation levels.
Data from the Bureau of Economic Analysis showed that prices (measured in the Personal Consumption Expenditures Index) rose by 4.2% y-o-y, a pace not seen in over 30 years.
The Fed chair expects high inflation to be “transitory” with prices of unusually high goods such as cars slated to come down soon.
The way Sandu sees it “the test for the Fed to start tapering the so-called quantitative easing program has had substantial further progress on its dual mandate goals of maximum employment and price stability”.
Against this backdrop, he notes that deep corrections in the price of goal present buying opportunities.
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The price forecast for gold has been slashed lower as the return to last year's record highs is unlikely as economic recovery tarnishes the safe-haven metal's appeal especially in investment demand, he adds.
As such, many analysts have revised their forecast for Gold to US$1,950 ($2,626.08) an ounce for the second half of the year from an earlier US$2,000 prediction.
Sandu, meanwhile “remains bullish for the long term despite the pressure that prices had from rising global government bond yields, which had incidentally also helped the Dollar”.
Cover photo: Bloomberg
