The S&P 500 index extended its winning streak to 6 days in a row this week marking the largest weekly gain in about two months. Improving economic data, positive developments in the fight against the coronavirus, and renewed investor confidence in loose monetary policy drove stocks higher. The major focus for investors this week was the highly anticipated speech on inflation from Fed Chairman Jerome Powell. Powell unveiled a new approach to inflation that would allow inflation to run above 2% to make up for periods of lower inflation.
S&P 500: 3,508 (+3.26%)
FTSE All-World ex-US (VEU): (+2.11%)
US 10 Year Treasury Yield: 0.74 (+0.10)
Gold: $1,965.70 (+1.28%)
EUR/USD: 1.1906 (+0.94%)
- Monday – The S&P 500 rallied to new highs on the news that the FDA authorized use of convalescent plasma for treatment of serious coronavirus cases.
- Tuesday – Raytheon Technologies, Pfizer, and Exxon Mobil will be exiting the Dow Jones Industrial Average and will be replaced by Amgen, Honeywell International, and Salesforce.com.
- Wednesday – Shares of Salesforce.com were up 26% after posting a record quarter and raising its guidance.
- Thursday – Fed Chairman Jerome Powell’s speech at the annual Jackson Hole Economic Policy Symposium was embraced by investors as stocks rallied and the yield curve steepened.
- Friday – Japanese stocks fell after Shinzo Abe, Japan’s longest serving prime minister, resigned for health reasons.
This new strategy to let inflation and employment run higher after years of stubbornly low inflation, essentially reaffirms expectations that the current low interest rate environment will continue for the foreseeable future. The major difference from prior policy moves is that the central bank will have more flexibility to let the economy run hotter after periods of weakness by allowing for pricing to overshoot and by also adjusting what it considered full employment to reach more workers. This comes after extensive policy review and acknowledgement by the Fed that the economy has not come close to the 2% inflation target set back in 2012.
Powell specifically addressed that their new goal for maximum employment is to build a stronger labor force that would extend to lower income communities, which have been more severely impacted during the pandemic. The view that low unemployment risks inflation running out of control has shifted to being much less of a concern for policy makers.
The other important factor identified as a long-term risk was financial stability. Language was added to the strategy document acknowledging that financial stability is needed to achieve their goals and signals continued support for financial markets.
The Fed’s commitment to loosen monetary policy during a fragile and unpredictable economic recovery has been a major driver of the rebound in the stock market. This new strategy has sparked both optimism and skepticism though on whether it can work. The biggest question that remains though is how they will do this. September’s meeting should provide more details on how this new strategy will be implemented into policy.