The Federal Reserve will allow inflation to run above 10%, said Fed Chairman Jerome Powell during the much-awaited virtual speech from the central bank’s annual Jackson Hole, Wyoming symposium.
Bitcoin’s price responded to the news quite visibly, forming an inverted V, as the digital asset jumped from $11,290 to just above $11,600. But only to come back down under $11,400, so it was all for nothing.
The good thing is Bitcoin has lately been reacting to the macro events in line with other assets. The digital gold acted exactly like the precious metal as gold pumped over 2% only to retrace it whole within the next minutes.
The US stocks meanwhile opened higher — S&P 500 made a new all-time high at 3,494, the ever-rising Nasdaq went to $11,688, and the Dow Jones Industrial average also went higher but is still down about 2% from its peak hit in February.
“Yields are spiking, driving the dollar up and metals down, together with crypto. Financial stocks are roaring, helping indices stay up,” noted trader and economist Alex Kruger.
“Even more central bank stimulus: That's what markets–across the board–have taken away, at least for now, from Fed Chair Powell's remarks on changes to the Monetary Policy framework,” said Mohamed A. El-Erian, Chief Economic Adviser at Allianz.
This means everything that has already been going up will continue to go up.
Powell speech: Implication for stocks. Stock traders have fairly straightforward view of Fed changes:
1. Low unemployment not spurring inflation
2. Rates lower for longer
3. May have higher levels of inflation without Fed raising rates
4. Positive for stocks@CNBC
— Bob Pisani (@BobPisani) August 27, 2020
However, tech stocks showed a weakness with Amazon, Facebook, Netflix, and Alphabet falling. Meanwhile, bank stocks moved higher.
The yields on benchmark 10-year Treasury notes dropped to 0.734% after the Fed said it would stop the practice of preemptively lifting interest rates to prevent inflation from rising.
The US dollar index, however, enjoyed the Fed's dovish tone to make a strong rebound from 92.5 to over 93.
— PlanB (@100trillionUSD) August 27, 2020
The chairman clarified that the “Fed will not hesitate to act if inflation rises above levels consistent” with its goal to support the labor market and broader economy. He also said that there is no particular method to define average inflation, moreover, “policy will not be dictated by any formula.”
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.” And we need to support workers from the most affected sectors, he said.