Last Friday, Fed Chairman Jerome Powell delivered a long-awaited speech. Market participants have been anticipating it for 2 weeks. They wanted to know when the Fed would start reducing the quantitative easing program as it may be the first step to tighten monetary policy. Unfortunately, by the middle of last week, investors were well aware that Powell was unlikely to specify the time and his speech would be rather neutral. Hence, they were expecting Powell to give some comments on the labor market recovery or inflation, or the coronavirus, yet he would not give any specific details. As a result, investors' expectations turned out to be true. Jerome Powell once again stated that inflation soared due to temporary factors that would disappear by the end of the year. So, inflation will begin to slow down. The Fed is ready to intervene at any time and use all the tools available to stop the acceleration of consumer prices. According to Powell, the majority of FOMC members agree to start reducing the asset purchases, which now amounts to $120 billion per month. Powell said that at the last meeting of the Fed, he was sure that the US economy was recovering at a good pace. Thus, he supported the tapering of QE this year if the economy continues to expand. Powell believes that the labor market is recovering buoyantly and inflation has every chance to reach a target level of 2%.
What hints could traders get from Powell's speech? To start with, the Fed is set to reduce the QE program in 2021. Additionally, the regulator will not rush to announce the reduction of QE due to the coronavirus risks, which again poses a threat to the economy and its recovery. Yet, investors knew all this before Powell's speech at Jackson Hole Symposium. Therefore, they hope that there will be more clarity in the September meeting as the regulator will conclude the next meeting and announce its results. Notably, traders were disappointed by Powell's speech. The US dollar fell by about 50 pips against the euro and by 60 pips against the pound sterling. At the same time, the decline of the US dollar was not so sharp. US stock indexes on Friday climbed higher and once again reached new record highs. Everything is rather predictable. The Fed has not announced the end of QE, which means that for some time it will pump the economy with money, which is bullish for the US stock market.
The material has been provided by InstaForex Company - www.instaforex.com