Juice The Stock Market And Destroy The Dollar!! (#GotBitcoin?)
Investors are ramping up wagers on the falling currency, believing the surge in coronavirus cases will hamper U.S. business activity and drive even more government spending. Juice The Stock Market And Destroy The Dollar!! (#GotBitcoin?)
The dollar has made a sharp U-turn this summer following a long rally, confounding many traders but potentially adding fuel to this year’s surprising stock-market rebound.
The ICE Dollar Index, which measures the dollar against a basket of other major currencies, in July notched its worst month in nearly a decade and recently hit a two-year low. The fall extended a reversal that began in late March, spurred lately by ballooning worries that mounting coronavirus cases will stall the U.S. economic rebound, even as growth accelerates in countries from China to Germany.
Big-name investors such as Ray Dalio and Jeffrey Gundlach have recently said publicly that the flood of U.S. government spending being injected into the financial system could eventually stoke inflation, eroding consumers’ purchasing power. Surging budget deficits tend to make investors less likely to hold a country’s currency. Fitch Ratings on Friday revised its credit rating outlook for the U.S. to negative from stable, though it maintained its top, triple-A rating.
At the same time, the currency’s slide is adding further support to the booming market rally, lifting stocks and commodities. A weaker dollar boosts multinational companies, which see their products get more competitive abroad and can more easily convert overseas profits into dollars. It also makes products and investments that are priced in the currency cheaper for overseas investors, supporting demand for a host of financial assets. U.S. stocks have climbed near five-month highs recently, while raw materials are paring much of their 2020 decline.
“These things are denominated in dollars, and the dollar is getting crushed,” said Christopher Stanton, chief investment officer of Sunrise Capital Partners. He expects the trend to continue and is directly wagering against the currency, betting on gains in the euro against the dollar and buying gold, which some investors are using as an alternative store of value. Gold recently climbed to all-time highs for the first time since 2011.
The dollar’s decline upends a yearslong climb that was fueled by bets that U.S. economic growth would outpace activity overseas and let the Federal Reserve keep interest rates among the highest in the developed world. Now, the coronavirus is forcing the central bank to keep rates near zero, slicing much of the gap between rates in the U.S. and other nations and limiting investor returns from holding the currency.
Despite the tumble, few on Wall Street believe the dollar is on the brink of losing its status as the world’s reserve currency, held in bulk by global central banks and used to finance most international transactions. The dollar remains relatively strong following its long climb, and analysts say economic data points like export growth justify the reversal. Dollar reserves also tend to increase when the currency weakens because it gets easier for central banks to add to their dollar assets.
Still, its reversal marks a key development for money managers. Investors this week will seek to gauge whether the U.S. economic recovery slowed last month by parsing the July jobs report and purchasing managers’ indexes. The next round of corporate earnings from companies, including Booking Holdings Inc. and Hyatt Hotels Corp., will also provide a window into the prospects for the bruised travel industry.
Firms that earn more money overseas could benefit if the dollar’s recent weakness persists. So could international markets—many have long trailed U.S. stocks, but with growth overseas poised to catch up to domestic economic activity, they are now in position to attract more capital.
“The other houses are now looking just as attractive,” said Nancy Perez, senior portfolio manager at Boston Private, which has recently increased its investments in shares of companies based in emerging markets in its asset-allocation strategies. “They have much more potential than the U.S.”
Hedge funds and other speculators are favoring everything from the Swedish krona to the Brazilian real, positioning for more dollar weakness. Net investor bets on a weaker dollar recently climbed to their highest level since April 2018, Commodity Futures Trading Commission data compiled by Scotiabank show.
“We are in a stage of very high momentum,” said Ed Al-Hussainy, senior interest-rate and currency analyst at Columbia Threadneedle Investments. He is betting that emerging-market currencies such as the Mexican peso and South African rand will extend their recent rebound. “Everybody is getting caught up in it.”
The latest drop in the currency comes with the euro surging Thursday to two-year highs against the dollar after European Union leaders recently agreed on a more-than-$2 trillion spending package.
The aid is bolstering investors’ faith in the bloc’s unity and economic recovery since European countries hadn’t spent as much previously. Many of the countries have also been more successful than the U.S. in containing the pandemic.
“There are now doubts about the idea that the U.S. would end the year in a better place than Europe,” said economist Brad Setser, a senior fellow at the Council on Foreign Relations.
Investors say that the economic picture could make this dollar slide longer lasting, with Fed programs also alleviating early-year dollar shortages in overseas funding markets. But some are still wary of reading too much into the recent drop, with November’s presidential election among the factors that could shift already volatile economic conditions.
Some analysts also question whether the weaker dollar will end up boosting exports and other economic data points given the scope of the global recession.
“It’s nearly impossible to figure out exactly what the numbers will end up being,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
Yellen Ending Trump Dollar Tumult Promises Cheers In Markets
Now that President-elect Joe Biden has picked Janet Yellen as his Treasury secretary, currency markets are growing more confident that the U.S. government’s policy for the dollar will be more clear.
Donald Trump’s administration conjured chaos about the greenback, one moment threatening to intervene or otherwise fretting about the currency’s strength, then — often on the same day — taking a contradictory stance. From Bill Clinton’s administration through Barack Obama’s, the federal government adhered to the position that a strong currency is a reflection of the strength of the U.S. economy.
Prospects that Yellen will returning clarity on dollar policy may help stabilize the $6.6-trillion-a-day currency market that’s the backbone of global finance and commerce. Some traders are hopeful even though the former Federal Reserve chair and her new boss, Biden, are expected to take time to unfold their position on the greenback as they focus initially on fighting the pandemic and its economic damage.
“The Yellen appointment may formulate a more coherent policy for the dollar,” Ben Emons, head of global macro strategy at Medley Global Advisors, said in a note. “The reason is that during Yellen’s tenure as chair, Fed policy uncertainty fueled the strength of the dollar. Her experience and knowledge could see a better, formal setting around dollar policy.”
The U.S. Treasury secretary has historically been in charge of the dollar, with a unit in the department dedicated to foreign exchange policy.
But tradition went by the wayside under Trump. The president and his aides freely discussed the currency, often overstepping Treasury Secretary Steven Mnuchin, and the administration overall showed far less commitment to a strong dollar due to Trump’s obsession with U.S. trade deficits.
In July 2019, Trump and his top economic adviser, Larry Kudlow, publicly debated a U.S. intervention to weaken the currency after the European Central Bank signaled looser monetary policy, causing the euro to weaken against the greenback.
Within hours of each other, Kudlow said in a television interview that the administration had decided not to intervene, only to have Trump tell reporters that the idea was still under consideration.
Former Treasury Secretary Larry Summers says it’s time for the U.S. to return to the strong-dollar policy established during the Clinton administration.
“It would be unwise to appear actively devaluationist or indifferent to the dollar,” he said earlier this month in an open letter advising the next Treasury chief.
Yellen has in the past noted that a stronger dollar exacerbates the U.S. trade deficit and dampens growth, while a weaker currency does the opposite. She also in 2014 warned her then-Fed colleagues about the risks of commenting on the dollar.
“As a former Fed chair, Yellen also fully understands the impact she could have on markets,” Ian Katz, an analyst at Capital Alpha Partners, wrote in a note. “She will choose her words carefully. Investors shouldn’t worry that she will make off-the-cuff remarks that will spur volatility.”
Any policy changes under Yellen would coincide with growing consensus on Wall Street that the dollar has entered a period of prolonged weakness. A Bloomberg gauge of the greenback’s value just hit a 2 1/2-year low.
“Given that we see the dollar falling through Biden’s term, the issue of dollar policy could be of some significance,” Standard Bank’s head of foreign-exchange strategy, Steven Barrow, said in a note. “More than this, the era of almost non-existent foreign-exchange intervention by developed nations could be about to end as well.”
The U.S. last intervened in currency markets in 2011, along with international peers, after the yen soared in the wake of that year’s devastating earthquake in Japan.
The dollar has fallen more than 11% since March, as measured by the Bloomberg Dollar Spot Index.
Dollar bears have been emboldened by expectations that the Federal Reserve will keep rates near zero for years and that there will be diminished “haven” demand for the dollar given promising results for coronavirus vaccines.
That trajectory may continue with Yellen at Treasury, as she’s seen pushing to join Fed Chair Jerome Powell’s policy of lower-for-longer interest rates with extended, expansionary government spending.
Not everyone agrees Yellen will make strong pronouncements on dollar policy, since her focus will be on the domestic economy. Nine months into the pandemic, more than 6 million people still claim extended unemployment assistance and joblessness is again on the rise as U.S. coronavirus infections spike.
“Yellen is unlikely to forcefully articulate a specific policy on the dollar as she no doubt recognizes that domestic policies are far more important to the U.S. recovery and that trying to control or jawbone the exchange rate’s value should not be a major priority,” said Eswar Prasad, who wrote ‘The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance.’
Behind Every Record-Breaking Market Level Is The Fed’s Largesse
Each market milestone passed in 2020 is a reminder of the Federal Reserve’s extraordinary efforts to hold things aloft — and a belief that it’ll continue.
Consider today’s markets landscape. The dollar is the weakest since April 2018, pegged back by Treasury yields below 1%. That’s great news for emerging markets, and dollar bond sales in Asia have now topped $400 billion for the first time ever.
Global stocks are at record highs and copper is near a seven-year high. Even Bitcoin has hit new records. And there’s little denying that the Fed has had a lot to do with it.
The sweet spot for risk assets and the Fed may be one in which economies do well, but not too well — strong enough to prop things up, but not so hot that inflation starts to take off.
Strategists from firms like Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. expect markets generally to do well into 2021 as Covid-19 vaccines become available and the world economy continues to recover.
With prices already so stretched, it could all come crashing down if the economy becomes so hot that inflation takes off and the Fed starts to discuss taking its foot off the gas — or even raising rates.
For now, though, many strategists seem to be comfortable with the way things are going, sticking with Fed Chairman Jerome Powell’s assertion from June that “we’re not even thinking about thinking about” raising rates. The consensus among strategists is more stimulus, rather than less, and overnight index swaps aren’t pricing a Fed hike until late 2023.
“We believe the Fed is quietly monitoring the situation and will not allow the market to disrupt their lower-rates-for-longer approach,” said Anders Faergemann, a money manager at PineBridge Investments in London. “It would be too early to talk about or position for a taper tantrum.”
The Fed factor is rarely far from focus, especially if the economy starts roaring back as more people get vaccinated. It’s not impossible to imagine a sharp uptick in inflation as shoppers, who have been cooped up for months at home, start splurging on holidays and lavish celebrations of freedom.
In a note on Tuesday, Morgan Stanley economists led by Chetan Ahya listed domestic inflationary pressures and a “disruptive” change in Fed policy as among the top risks for emerging markets next year.
But that’s not the consensus view. Morgan Stanley is expecting a strong rebound in emerging markets powered by a weak dollar, low U.S. interest rates and the end of the pandemic.
“We can also be assured that the Fed will indeed be slow to normalize monetary policy,” wrote FX Strategist Kit Juckes of Societe Generale SA on Nov. 25. “They have promised to be, and probably won’t get enough inflation soon enough to make them change their minds.”
Markets Have Infinite Reasons To Be Cheerful
The $5.6 trillion of central bank stimulus means investors should keep faith in the recovery trade.
As we head toward the end of 2020, we’ve spent the final run-up to Christmas much as we have the rest of the year: worrying about Covid-19. The beginning of this week saw a switch into risk-off mode in financial markets as a fast-spreading new virus strain emerged in Britain and Western health systems remained under pressure. That has shaken confidence in a positive start for 2021.
But the momentum behind the global recovery trade will take some stopping. Now would be the time for investors to take advantage of any temporary setbacks and keep the faith that the pandemic will eventually dissipate.
Vaccine makers seem confident that their shots will cope with the new mutation, and if all else fails we can rely on central bankers to do whatever it takes to defend economies and markets.
Never has the traders’ mantra “Don’t Fight the Fed” been so accurate. There’s every indication it will be the same in 2021.
Some $5.6 trillion of stimulus has been pumped into markets by the major central banks since March, so it’s no coincidence that we end the year with record highs for U.S. Stocks and global bond yields close to all-time lows.
Ever since the global financial crisis, central bankers’ Quantitative Easing habit hasn’t been shaken off. This year has seen the biggest asset-price reflation ever. One thing is certain for 2021: There’s another generous helping already lined up.
The U.S. Federal Reserve confirmed last week that $120 billion of Treasury bond and mortgage-backed securities will be acquired per month, plus a smattering of other securities that may be added according to discretion.
That’s nearly $1.5 trillion over 2021, on top of the $3.3 trillion bought by the Fed in 2020. Add in all the U.S. fiscal stimulus as well, with a $900 billion package finally approved by Congress, and it’s safe to say there’s a favorable backdrop for investors.
The rest of the world isn’t leaving the heavy lifting to the Fed. The European Central Bank just added another 500 billion euros ($610 billion) to its pandemic response, bringing it up to a total 1.85 trillion euros stretching into 2022. The Bank of England has made another 150 billion pounds ($20 billion) of QE purchasing power ready for dispersal next year.
The Swiss National Bank took the news of being labelled a currency manipulator by the U.S. Treasury with the vow to renew its interventions (its purchases of foreign currency end up in equities and bonds). The Bank of Japan has bought more than 7 trillion yen ($70 billion) of equity-linked exchange-traded funds this year.
So globally there will be both the ongoing flow of new QE into the system and the benefits of central banks maintaining their huge existing “stock” of bond holdings. Ever higher balance sheets can only bolster asset prices. Analysis from the Bank of England shows that in the absence of bank lending — which creates new assets — all QE can do is inflate the value of existing assets. This is infinite money chasing finite assets such as stocks and bonds, and even Bitcoin.
Two things have been missing that have thus far impaired QE’s effect on economic growth. First, the transmission mechanism via banks into real-economy lending hasn’t been functioning properly; it’s been particularly lacking in the European Union. Second, there has been a noticeable absence of aggressive and focused spending from governments on measures that will lift economic output meaningfully.
Happily, the fiscal side of the equation is finally being addressed with the accelerated distribution of government spending packages kicking in next year across much of the world — notably in the EU with its groundbreaking 750-billion euro pandemic recovery fund. The coordination of monetary policy and fiscal stimulus should create a multiplier effect if done properly.
There are plenty of negatives still around, but my colleague Cameron Crise reminds us of an episode from the trading classic “Reminiscences of a Stock Operator,” where a crafty market veteran keeps repeating, “It’s a bull market, you know.”
The big money is made following the big trend not exiting on temporary setbacks. Keep in mind what the Fed and its many friends have in store next year.
Jerome Powell Says Constant Money-Printing Policy To Continue Indefinitely
Fed likely to hold interest rates near zero and continue asset purchases for some time, chairman says.
Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s commitment to maintaining easy-money policies until the economy has recovered further from the effects of the coronavirus pandemic.
“The economy is a long way from our employment and inflation goals,” Mr. Powell said in testimony to the Senate Banking Committee, a statement he has repeated in recent weeks.
The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until “substantial further progress has been made,” a standard that Mr. Powell said “is likely to take some time” to achieve.
Mr. Powell delivered the Fed’s semiannual monetary-policy report to members of the committee Tuesday and is set to do the same Wednesday at a hearing of the House Financial Services Committee.
The hearings come as steady progress on vaccinations and multiple rounds of fiscal stimulus have brightened the economic outlook, the Fed chief noted. His remarks suggested, however, that improvement won’t prod the Fed to tighten monetary policy anytime soon.
“I think Powell was trying to make a very clear case that the Fed is committed to achieving a complete recovery,” said Michelle Meyer, head of U.S. economics at Bank of America. “While the news has been positive on that front when you look at the drop in virus cases and you look at some of the recent economic data, the Fed is certainly not ready to pivot on its policy stance.”
Daily coronavirus cases have fallen from their early January peak, and recent economic data including retail sales, industrial production, hiring and service-sector activity have indicated economic growth picked up in the new year after slowing in late 2020.
Consumer confidence in the U.S. rose in February for the second consecutive month as Americans grew more upbeat about current business and labor market conditions, the Conference Board reported Tuesday. Still, nearly a year after the crisis erupted in the U.S., the nation has about 10 million fewer payroll jobs than in February 2020.
Inflation also remains below the Fed’s 2% goal, a long-running worry among policy makers.
Rising U.S. Treasury yields in recent weeks suggest some market participants may have the opposite concern: that prices could start to rise faster than the Fed expects.
Mr. Powell said Tuesday that inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens. But that, he said, would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.
He said he wouldn’t expect inflation to reach “troubling levels,” and wouldn’t expect any increase in inflation to be large or persistent.
“Inflation dynamics do change over time but they don’t change on a dime, and so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” he said.
Mr. Powell painted a brighter picture of the economy Tuesday than the last time he appeared before lawmakers on Dec. 1. Covid-19 cases and deaths at the time were surging, parts of the country were tightening restrictions on activities and public vaccination campaigns hadn’t yet begun, prompting Mr. Powell to warn at the time that the outlook for the economy was “extraordinarily uncertain.”
“Once we get this pandemic under control, you know, we could be getting through this much more quickly than we had feared, and that would be terrific,” Mr. Powell said Tuesday. “But it’s not done yet. The job is not done.”
Mr. Powell said it will take more than lower unemployment to convince Fed officials that the labor market has recovered. The jobless rate was at 6.3% in January, down from a recent high of nearly 15% in April. Before the pandemic, the rate had fallen to a half-century low of 3.5%.
Mr. Powell said the Fed monitors several measures of the labor market’s health, including the percentage of the population that is employed. That share was 57.5% in January, down from 61% before the pandemic.
“When we say maximum employment, we don’t just mean the unemployment rate,” he said. “We mean the employment rate.”
The virtual appearances come as lawmakers are negotiating President Biden’s proposed $1.9 trillion coronavirus relief package, which prompted questions to Mr. Powell about his assessment.
The Fed chairman credited past rounds of fiscal assistance for helping to fuel a recovery that has been faster than many economists expected. But he declined to comment on Mr. Biden’s proposal or even say whether he thought more fiscal aid was needed.
Sen. John Kennedy (R., La.) asked Mr. Powell whether he would be “cool with” Congress not passing Mr. Biden’s stimulus package.
“I think by being either cool or uncool, I would have to be expressing an opinion,” Mr. Powell said. “As I’ve said, it’s not appropriate for the Fed to be playing a role in these fiscal discussions.”
While he reiterated his view that reducing the federal budget deficit would be necessary at some point in the future, he added that achieving a full economic recovery should be the higher priority right now.
With overnight interest rates near zero, the Fed has limited room to cut them further to provide more stimulus. Officials have often noted that Fed tools such as low rates and bond-buying are poorly suited to provide targeted relief to the parts of the workforce and economy hardest hit by the pandemic.
These include women and minorities, low-wage workers and hard-hit sectors including tourism, hospitality and leisure.
Mr. Powell also faced a number of questions related to financial stability, in particular about the risks that very low interest rates could fuel asset bubbles and cause inflation to take off.
A quarterly financial-stability review by Fed staff economists in January characterized the “vulnerabilities of the U.S. financial system as notable,” with asset valuations seen as elevated, particularly in corporate bonds, according to minutes of the Fed’s policy meeting last month. That reflected more concern than expressed in the staff’s previous assessment, in November, which characterized asset valuations as moderate.
Mr. Powell played down such risks at a press conference after that meeting, saying that the Fed’s main priority should be to address the economic distress caused by the pandemic. “I would say that financial stability vulnerabilities overall are moderate,” he said then.
The Fed’s semiannual report delivered Tuesday said that business leverage “now stands near historical highs” and that insolvency risks at small and midsize firms remain considerable.
Noting that asset bubbles triggered recessions in 2001 and 2007-09, Sen. Pat Toomey (R., Pa.), the top Republican on the panel, asked Mr. Powell if he sees a link between elevated asset prices and the Fed’s easy-money policies.
“There’s certainly a link,” Mr. Powell said. “I would say, though, that if you look at what markets are looking at, it’s a reopening economy with vaccination, it’s fiscal stimulus, it’s highly accommodative monetary policy, it’s savings accumulated on people’s balance sheets, it’s expectations of much higher corporate profits…. So there are many factors that are contributing.”
Third Covid-19 Stimulus Package Could Revive Inflation In 2021
Economists surveyed by WSJ expect 5.95% GDP growth, fastest in nearly 40 years.
The nearly $1.9 trillion relief package that passed Congress on Wednesday is projected to help propel the U.S. economy to its fastest annual growth in nearly four decades, reduce poverty and revive inflation.
The legislation—following trillions of dollars in federal aid last year and arriving amid rising Covid-19 vaccination rates—prompted economists surveyed by The Wall Street Journal in recent days to boost their average forecast for 2021 economic growth to 5.95%, measured from the fourth quarter of last year to the same period this year. That was up from their 4.87% projection last month and would be the U.S. economy’s fastest since a 7.9% burst in 1983.
The analysts also lifted their forecasts for inflation and job growth from last month’s survey. The new poll found that they expected consumer prices would rise 2.48% by December from a year earlier and projected that employers will add an average 514,000 jobs a month over the next four quarters.
Some economists warned they might be underestimating the bounce to come. “The impact of the $1.9 trillion relief package could well ignite faster growth than we anticipate,” said Constance Hunter, chief economist at KPMG.
President Biden’s Covid-19 aid bill adds to considerable tailwinds that have already produced a faster-than-expected recovery from last year’s collapse in economic activity amid restrictions to contain the coronavirus.
These include roughly $4 trillion in spending that Congress authorized last year to combat the pandemic, easy-money policies by the Federal Reserve and—most important—an expected reopening of businesses and schools as the population is vaccinated against Covid-19.
“It’s unprecedented,” Oxford Economics chief U.S. economist Gregory Daco said of the fiscal response to the pandemic. He expects the latest legislation to add 3 percentage points to U.S. GDP growth this year, and between 3 million and 3.5 million jobs.
The new outlook, if it materializes, would defy policy makers’ and business executives’ expectations last year that the economy’s path was likely to resemble Nike’s “swoosh” logo—a sharp drop followed by a long and grueling recovery.
It also contrasts starkly with the aftermath of the previous recession, when employers shed 8.7 million jobs between 2008 and 2010, and took more than six years to add them back.
The coronavirus pandemic led to the loss of 22 million jobs between February and April of last year. Nearly 13 million of those jobs have been recovered. Treasury Secretary Janet Yellen said Monday that she expects the U.S. labor market will return to its pre-pandemic health by next year.
“There are no benefits to enduring two historic economic crises in a 13-year span, except for one: Our mistakes are fresh in our memories. We can learn from them,” Ms. Yellen said in a speech Tuesday, outlining the case for a more muscular fiscal response than occurred after the 2008 financial crisis.
The U.S. recovery is also expected to underpin a stronger global comeback. The Organization for Economic Cooperation and Development said the latest aid package, along with faster vaccination, could increase U.S. GDP growth by 3 percentage points to 6.5% in 2021, measured year over year, and help drive demand for U.S. trading partners, including Canada, Mexico, China and euro area countries.
The aid package includes another round of $1,400 stimulus checks for most Americans, extends enhanced jobless benefits through September and provides billions to help schools reopen and accelerate vaccine production and distribution.
It also includes provisions aimed at supporting low-income families, including an enhanced child tax credit, rental assistance and additional funding for food stamps—provisions that Columbia University researchers estimate will cut child poverty in half this year.
The economy has shown recent signs of a pickup, due in part to pandemic aid that Congress authorized at the end of last year and vaccine distribution. Household income rose 10% in January, priming the economy for rapid growth, and consumer spending climbed 2.4%, the first gain in three months. Employers added 379,000 jobs last month, primarily in the leisure and hospitality sector, after cutting jobs at the end of 2020.
“We were probably already on pace for a pretty good economy, assuming everything with the pandemic broke our way,” said Wendy Edelberg, an economist and senior fellow at the Brookings Institution, who didn’t participate in the Journal survey. “This bill absolutely provides a lot of insurance around that.”
Ms. Edelberg said she thinks the bill’s biggest impact could come at the end of 2021 and carry into 2022, as households that faced fewer financial constraints begin to spend down their savings and social-distancing measures presumably end.
She projects the economy will grow 7% this year and 4% in 2022 before returning to much more modest growth in 2023.
“The challenge policy makers will face and people in the economy more generally is how to manage the slowdown,” she said.
The forecasts aren’t without risk. Economists surveyed by the Journal warned that a mutation of the virus resistant to available vaccines, or a slowdown in the pace of vaccinations, could alter the outlook.
The looming demand surge has also fueled concerns that high inflation could follow, forcing the Federal Reserve to raise interest rates in response. That could deal a setback to the economy and labor market before a complete recovery is achieved.
“There’s a real possibility that within the year, we’re going to be dealing with the most serious incipient inflation problem that we have faced in the last 40 years,” former Treasury Secretary Lawrence Summers said in late February.
Fed officials acknowledge that annual inflation is likely to jump in the coming months, as the economy picks up and ultralow readings from March and April of 2020 fall out of 12-month price indexes. There is also a possibility that a spending surge after the economy reopens, or supply-chain bottlenecks, could cause some prices to rise faster than normal.
But decades of slowing inflation—the consequence of globalization, technological advances and aging populations—in rich countries prompted the Fed last year to ditch its longtime practice of raising interest rates to pre-empt higher prices. Now, policy makers plan to wait until inflation hits their 2% target and is expected to remain above it for some time before they will contemplate interest-rate increases.
Of the economists surveyed, 80.6% said they expect inflation to rise above the Fed’s 2% target for a period of time due to the latest relief package. But 85% also don’t see the Fed raising interest rates until 2022 or later.
Economists in the Journal survey said they see annual inflation rising to 2.8% by the middle of this year, then falling gradually after that.
“Inflation will reach levels rarely experienced over the past decade, at close to 3% in mid-2021, but uncontrolled overheating isn’t likely,” Mr. Daco said.
It’s Time To Talk About The Bogeyman In The Market: Inflation
Central banks unlikely to react to higher prices triggered by supply disruptions, FTSE Russell’s Lawlor says.
Financial markets have become obsessed with the possibility of faster-than-normal inflation this year as economies reopen from Covid lockdowns. But inflation is a nuanced concept, so what different types of price rises should we expect? And most importantly, what does it all mean for markets in 2021? Joining the “What Goes Up” podcast this week to discuss this and other timely market topics is Philip Lawlor, head of global investment research at FTSE Russell.
Some Highlights Of The Conversation:
“This is all about temporary base effects and supply disruption hitting a pickup in demand. The risk is that this is going to hit an economy where the labor market is not going to see wage growth. We’ve still got some structural headwinds in terms of the labor market as we work through this Covid impact.
And I think the central banks are quite right to most probably just say, `we’ve got to err on the side of caution and just wait to see how this works its way through.’
“Of course, if that leads to a structural shift and we do get that being reflected in a pickup in growth, then they need to respond more aggressively. But don’t act too quickly because that will create what we call a policy mistake. “
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