WeekWatch -‘the Federal Reserve… upped its economic growth projections’ June 2021
A week after the US posted inflation of just over 5%, the Federal Reserve (the US central bank) upped its economic growth projections, while bringing forward its estimates for when it may increase interest rates. Although the Federal Reserve will keep its high levels of support in place for now, it has begun to prepare markets for a gradual tapering of its support as the US recovery gains traction.
Jerome Powell, Chair of the Federal Reserve, said projections for when conditions would be right to raise rates suggest this could happen in 2023, earlier than prior projections of 2024. Powell also said officials were “talking about talking about” reducing its asset-purchase levels in the future.
This matters for investors because central bank actions have been a key driver of the market recovery that began last year. By keeping interest rates low (and with other forms of support such as bond purchases) central banks around the world have helped to support asset prices through the pandemic. However, with economies now recovering, many are preparing to taper down their levels of support. Although this will help to keep inflation in check, it is likely to have a negative effect on some asset prices.
Following last week’s Federal Reserve meeting, there is a general expectation that taper discussions in the US will begin in earnest at its Jackson Hole meeting in August, with an announcement in the following months.
Despite the fact that the Federal Reserve has brought forward the date at which it will consider increasing interest rates, investors should remember that the big picture hasn’t changed drastically in recent weeks, suggested Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
“It seems very wrong, in our view, to conclude that the economic backdrop has changed and equally wrong to think that the Fed has fundamentally changed its policy framework,” he wrote.
Outside of US events, the UK’s Office for National Statistics revealed last week that inflation had jumped 2.1% in the year to May, following a surge in consumer spending and rising fuel prices. The following days saw the FTSE 100 fall modestly.
Discussing the current trend of rising inflation, David Winborne of Impax Asset Management, a fund manager for St. James’s Place, compared the current environment to 2016, when Donald Trump was elected to become the US president.
“Even though it’s not an interest rate shock at the moment, we’ve got an inflationary shock. There’s a similar dynamic in terms of the particular sectors which are performing quite well,” he said.
Even though this can present a challenging environment for investors right now, looking ahead the situation remains positive, he added.
While the US Fed bringing forward its rate rise plans, and UK inflation continuing to climb, might have provided wider market changes, Cristiano Ronaldo caused arguably the biggest stocks and shares story of the week.
Speaking at a Euro 2020 press conference, Ronaldo removed two bottles of competition sponsor Coca- Cola from view, replacing them with water. The move caused the company’s share price to fall 1.6%, which, given its size, amounted to a drop of around $4 billion.
BlueBay and Impax Asset Management are fund managers for St. James’s Place.
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