Caught off guard: Why the Fed meeting minutes surprised markets
On the latest edition of Market Week in Review, Director of Investment Strategies Shailesh Kshatriya and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the meeting minutes from the U.S. Federal Reserve (the Fed), the latest inflation data and the recent volatility in cryptocurrency markets.
Is the Fed thinking of tapering its quantitative-easing program?
The release of minutes from the Fed’s April 27–28 policy meeting proved to be more interesting than expected, Kshatriya said, leading to some turbulence in markets. “The meeting minutes showed that Fed officials are open to the idea of making adjustments to the central bank’s asset–purchasing program if the country continues to make rapid and substantial progress toward the Fed’s dual mandate of stable prices and full employment,” he explained.
Markets were caught off guard by this revelation, Kshatriya said, because it suggested that the Fed might be thinking about tapering its monthly bond purchases of US$120 billion earlier than anticipated. An earlier wind–down in quantitative easing, in turn, could lead to an earlier tightening in monetary policy than what markets have been pricing in, he explained.
Kshatriya stressed, however, that the fact that Fed officials are engaging in these types of deliberations is actually a good thing. “Ultimately, these conversations are a reflection of the fact that the U.S. economic recovery is truly strengthening,” he remarked.
Energy, housing costs fuel rise in Canadian consumer prices
Fresh off the heels of a rapid rise in U.S. inflation during April, Kshatriya said that prices are also increasing at a substantial rate in both Canada and the UK. In Canada, the nation’s consumer price index jumped by 3.4% in April, on a year–over–year basis—compared to March’s rise of 2.2%, he stated. Meanwhile, in the UK, prices rose by 1.5% in April on a year–over–year basis, versus the 0.7% increase observed in March, Kshatriya said.
Similar to the U.S., some of the inflationary pressures in Canada and the UK can be attributed to energy prices, which have increased considerably in the past year, he noted. Part of this is due to inflation base effects—the term used by economists to describe distortions in inflation data that occur when current numbers are compared to artificially low (or high) numbers from the previous year, Kshatriya explained.
Another factor contributing to April’s pick–up in inflation were the rising prices in sectors of the economy more sensitive to the broader economic reopening, including clothing, travel and leisure, he said. In Canada, the country’s red–hot housing market was also to blame, Kshatriya added. “Canadian home prices are skyrocketing, and this is feeding into the broader inflation figures,” he said, noting that the Bank of Canada recently created a new indicator, called the House Price Exuberance Indicator, to measure excess in the housing market.
Meanwhile, in Japan, core inflation actually fell by 0.1% in April, on a year–over–year basis, Kshatriya said. However, plummeting cellphone fees were largely responsible for the drop, he explained, noting that they sank by 27% in April alone. Without this, core Japanese consumer prices likely would have experienced an increase last month, Kshatriya stated.
What’s behind Bitcoin’s wild ride?
Turning to the cryptocurrency market, Kshatriya noted that the space was rocked by volatility the week of May 17, with Bitcoin off nearly 40% from its mid–April high at one point.
“It’s important to understand that the crypto area of the market is still fairly new, and it’s still something investors are trying to get a handle on. At Russell Investments, we’re still trying to understand what Bitcoin’s price patterns are and how it behaves in different market, macro–economic and inflationary environments,” Kshatriya explained. That said, it’s very clear that cryptocurrencies such as Bitcoin are highly volatile, as the events of the last few days demonstrate all too well, he concluded.