Mid-Market Update: The Fed is the new BOJ, Risky Asset Rally Faded, Powell didn’t do enough, Oil drops, Gold disappointed

Fed Chair Powell put investors on roller-coaster ride after unveiling a new policy framework of “average inflation targeting, cementing the Powell Put of keeping interest rates anchored for years.  With the adoption of allowing inflation to overshoot their target, the Fed is slowly becoming the BOJ.  The Fed did not give any hints on how they will achieve inflation and that is why no one is buying that it will happen anytime soon. 

The Fed’s longer-run goals of 2% inflation on average over time seems more like a fantasy.  The adjustment of the full employment mandate will not likely be relevant for years to come as the US economy is looking at a ‘couple of years’ of relatively high unemployment. The Fed will save the update on forward guidance on rates for another time, but for now it seems rates are going nowhere until the 2024 election. 

A couple years of elevated unemployment means the Fed will eventually need to increase their asset purchases. The easy trade of the day was to buy stocks. US equities roared higher as Powell signaled they will let the economy run hot for a while before they begin tapping their stimulus breaks.

Treasuries/FX

A volatile Jackson Hole speech that signaled a more flexible approach with inflation saw the Treasury yield curve steepen to the widest in a couple months.  The 2-year Treasury yield rose 0.4 basis points to 0.154%, the 10-year climbed 4.7 basis points to 0.736%, and the 30-year popped 7.4% to 1.487%.  The move in Treasuries was accompanied with a stronger dollar, but  both could be short-lived.  The Fed’s soft average inflation targeting means even if COVID-19 pushes up some prices, the environment predominantly remains in disinflationary conditions.  The dollar rebound will likely be faded here as the Fed will be the last major central bank to tap the stimulus breaks.

Oil

Crude prices are declining after Hurricane Laura did not hit Houston’s oil country and after Fed Chair Powell’s Jackson Hole speech delivered a stronger dollar.  The hurricane damage was tremendous after hitting Louisiana and Texas coasts. Over 1.5 million people were evacuated as dangerous flooding and massive power outages hit both states.  It seems the massive energy infrastructure was spared a direct hit and that is sending oil prices lower.  The focus should soon shift away from the hurricane impact and likely return to the crude demand outlook. 

Gold

Gold prices wildly fluctuated during Fed Chair Powell’s Jackson Hole speech. Gold bulls initially rejoiced the announcement of seeking inflation to average 2% over time, but then quickly came crashing down after noting they inflation overshoots could be moderate.  After the longest record long expansion failed to yield inflation, Wall Street is skeptical that the Fed will really see inflation anytime soon even when the economy is beyond the coronavirus. 

While the Fed will likely need to ramp up their asset purchases to support the economy, they didn’t provide any signs that will happen soon.  The dollar took off and the gold trade was quickly abandoned, albeit still stuck in its recent trading range. 

Gold’s path back to record high territory is still there, it will just take a while longer to get there. 

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