During question time after the Federal Open Market Committee (FOMC) rate decision, Jerome Powell made a very bold statement about monetary policy in the future. When asked when we should expect a less aggressive monetary policy, Powell replied that the economic recovery is far from complete (labour market and unemployment) and that we should not expect any monetary tightening before the end of 2023.
Christofer Govaerts, the chief strategist of Nagelmackers, commented in his market commentary: “A forward guidance of three years is unprecedented! Christine Lagarde (ECB) made statements in more veiled terms that were in line with those of Powell, but retained a little more flexibility. That is wise and what central bankers usually do. ‘In function of new data’, they say.”
Peter De Coensel, CIO Fixed Income at Degroof Petercam Asset Management (DPAM), argues that the decade ahead looks hopeful as innovations in business and labour practices can enable steady and promising growth. “These innovations should support and boost productivity. This will be essential to prevent harmful inflation from gaining a foothold.”
Asset bubbles
In recent months, house prices have been going up sharply, by some 6 per cent year-on-year. Stock markets are also reaching new records. This suggests that we are facing plenty of asset inflation.
De Coensel does not expect the Fed to intervene: “The Fed will not address the asset inflation we have witnessed over the past year. The Fed will not play the role of arbiter of speculation in the markets.”
The Fed’s strategy, according to De Coensel, is clear to market participants and points to a target interest rate of 2.25 to 2.50 per cent by 2025. Do not expect higher levels, according to him, as more tightening could derail markets and ultimately affect ordinary consumers. “The mistakes that led to the stock market crash of 1929 will not be repeated.”
Policy mistakes
De Coensel puts it this way in his market commentary: “Benjamin Strong, governor of New York’s central bank, opposed attempts to direct monetary policy towards the stock market, pointing to possible negative consequences. Unfortunately, he died in 1928 and the Fed came under the control of ‘bubble fighters’. The Fed raised interest rates from 3.5 per cent in January 1928 to 6 per cent in August 1929. What followed was a crash that led to a prolonged depression.”
Bernanke argues that the prevailing interpretation of the 1920s is not the correct one. The story goes that the stock market became overvalued, collapsed and caused the Great Depression.
De Coensel commented on Bernanke’s statement: “The truth, however, is that an overly ambitious Fed wanted to stop the rise in asset market valuations. I think the Fed will not repeat that mistake. Graduality will again be the preferred strategy. Whether the Fed succeeds in meeting the currently priced-in target rate of 2.50% should be at the centre of the debate today. As I stated earlier, in a scenario with a 1.5 per cent target rate, we should prepare for strong US bond markets in the coming years.”