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Investment strategy
August 29, 2021

‘Powell Play’: Investment implications of Fed’s policy

August 29, 2021
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

Fed Chair Jerome Powell’s recent speech focused on achieving maximum employment while downplaying inflation risk. An everything rally followed in its wake, but we believe such inclusive rallies will be increasingly rare deeper into a market recovery.

  • Powell emphasized the Fed’s overarching commitment to a deeper economic recovery in his Jackson Hole speech. Given that the US central bank is a major driver of the monetary policy underpinning broader employment and economic growth, the normalization of Fed interventions requires a gentle balancing act much like getting a patient out of the ICU.
  • On the one hand, a rapid withdrawal of Fed support could cause asset market declines that would raise the cost of capital and weaken confidence in the recovery. On the other, too much stimulus can be inflationary and counterproductive. Slowing the Fed’s financing pace to zero should take most or all of the coming 12 months.
  • Looking ahead, how the markets judge any view changes (and thus policy changes) on the part of the Fed will significantly determine the relative performance of certain equity market groups. Movements in the US yield curve are consistent with outperformance and underperformance of industries with very different short- and long-run growth characteristics.
  • We agree with Powell’s arguments that COVID has generated some very large industry distortions that have caused some consumer prices to jump discretely. Nonetheless, the Fed’s approach suggests some rebound in inflation-linked assets in the near-term. We outline the sectors most impacted in this Bulletin.
CIO Strategy Bulletin (PDF 546.69 KB)

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