No taper, no tantrum: Powell alleviates worries of scale-back in quantitative easing

On the latest edition of Market Week in Review, Senior Quantitative Research Analyst Abraham Robison and Senior Client Investment Analyst Chris Kyle discussed U.S. Federal Reserve (the Fed) Chairman Jerome Powell's response to market fears of a tapering in the central bank’s quantitative easing (QE) programme. They also provided an overview of President-elect Joe Biden’s coronavirus relief plan as well as recent global market performance. 

Powell squashes talk of early wind-down to QE

Amid market concerns that a sharper-than-expected rise in inflation could lead to a tapering of the Fed’s bond-buying programme, otherwise known as quantitative easing, Chair Jerome Powell recently stressed that the central bank has no plans to scale back asset purchases any time soon, Robison said.

“Given the clarity of Powell’s 14 January remarks, we expect that the Fed will continue to maintain the pace of quantitative easing by buying $120 billion in bonds through the end of the year,” he stated, adding that the Fed chair also pledged advance notice should conditions warrant consideration of a slowdown in purchases.

These conditions revolve around the Fed’s dual mandate of price stability and maximum employment, Robison explained-and when it comes to satisfying both, the U.S. is still a long ways off. For instance, newly released data showed that inflation rose 1.4% in 2020, on a year-over-year basis, which is still well below the Fed’s average target of 2%, he noted. Meanwhile, growth in the U.S. labour market has stalled, with the country reporting 140,000 job losses in December, in addition to a sharp uptick in weekly unemployment claims the week of 11 January.

“While numbers like these could be viewed as concerning, Powell stated that he believes the U.S. economy can return to February 2020 levels sooner than envisioned, and expressed reasons for optimism moving forward,” Robison said. All in all, the Fed chair’s remarks served as positive news for markets, he concluded.

Unpacking Biden’s $1.9 trillion relief plan

Transitioning to fiscal stimulus, Robison noted that President-elect Joe Biden unveiled a $1.9 trillion relief package on 14 January to help alleviate the COVID-19 crisis. Highlights of the plan include direct payments of $1,400 to Americans, an extension of federal unemployment benefits through September, $350 billion in aid to state and local governments, $170 billion to help reopen schools and an extension of the child tax credit.

With the Democratic Party holding control of both houses of Congress as well as the presidency come 20 January, Robison expects that this plan will likely pass into law. “If so, when added to the two other major relief bills from last March and December, the amount of stimulus injected into the U.S. economy since the start of the COVID-19 crisis would total roughly $5 trillion,” he remarked. 

U.S. markets had likely priced in a much lower amount of stimulus back in December, Robison noted, making the $1.9 trillion plan another piece of good news.

A reversal of fortune for 2020’s market laggards?

Broadening his gaze globally, Robison said that since the start of the year, value and small cap stocks have outperformed the broader global equity index-continuing a trend that began in mid-November. The reason? Rising yields and growing optimism over the health of the business cycle, due to positive vaccine news and additional fiscal stimulus, he said.

This has led to an outperformance to start 2021 in many areas of the market that struggled during the course of 2020, Robison said, noting that the Dow Jones Commodity Index is up 5% on the year. “The recent market rotation is yet another good reason for optimism as we head further into 2021,” he concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.