Bullish Catalyst on the Horizon: Fed’s Major Policy Change
US stocks started Monday on a muted note with S&P 500 down 0.2% and The Dow Jones Industrial Average -0.6%, while the Nasdaq Composite is up 0.5%.
The slow start of the week is because of the hurdles facing new stimulus packages and business’ dimming outlook while rising coronavirus infections threaten to hamper the economic recovery.
Former Federal Reserve Chairs Ben Bernanke and Janet Yellen meanwhile called for Congress to provide more fiscal stimulus to the U.S. economy.
While the government and central bank continue to provide more fuel for stocks, hedge fund billionaire Leon Cooperman said the market is overvalued, and overlooking “a number of things,” including the growing national debt.
The US Dollar has been falling and is now nearing its lowest levels since the start of the pandemic. Gold prices are little changed trading at $1,811.04 an ounce. But according to Citigroup, bullion could hit a new ATH in the next six-to-nine months.
Bitcoin meanwhile is the same as ever, stuck just above $9,000, for the past month. The range has been only getting tighter and tighter while altcoins are stealing the thunder. It is actually the tightest monthly range in bitcoin’s history.
While bitcoin’s extremely low volatility is expected to see a huge move soon, the Federal Reserve is also looking to keep the stock market happy.
In the last financial crisis the main issue was a lack of liquidity. In the next one, there will be too much. https://t.co/wI3fHEHZDH
— Mati Greenspan (Tweets are not trading advice) (@MatiGreenspan) July 20, 2020
Major bullish catalyst
After unprecedented money printing, the Fed is ready to push the inflation rate above its 2% target.
The traditional Phillips curve, which relies on the theory that inflation accelerates unemployment falls, is now approaching forecasting inflation. The Fed continued to raise interest rates till late 2018 when it was forced to lower it 2019, keeping inflation below the 2% target. Now, faced with the prospect of low inflation, the Fed is signaling an increase. Fed Governor Lael Brainard said last week,
“With inflation exhibiting low sensitivity to labor market tightness, the policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence.”
Brainard said the Fed should focus on the kind of employment outcomes achieved late in the previous recovery. She is saying that the Fed should not tighten policy until inflation reaches 2%, relying on actual inflation outcomes to determine the appropriate time to modify policy than to rely on an inflation forecast. Federal Reserve Bank of Philadelphia President Patrick Harker said,
“I don’t see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit.”
Bloomberg says the implication of this for financial markets would be that the Fed expects to “hold policy very easy for a very long time.”
The ultra-loose policy, as we have seen in 2020, has been working out well for stock markets, which are closer to hitting their new all-time highs. Economist and trader Alex Kruger said,
“Major bullish catalyst in the horizon: the Fed letting inflation rise above 2%. Assets to benefit the most are our 2020 friends: stocks, precious metals, and TIPS (as real rates go more negative).”
While a rising SPX, increasing inflation, and ultra-loose monetary policy speak well for bitcoin’s prices, the last couple of months doesn’t reflect strongly on the digital asset.
Bitcoin is the best performing asset of the past decade.
I believe it will also be the best performing in the next decade.
That said it is arguably the worst performing asset since it peaked at 20K in late 2017. Worth being realistic when investing heavily in a nascent asset.
— The Wolf Of All Streets (@scottmelker) July 20, 2020
But with the bitcoin market expecting bitcoin to rally soon and its correlation with equities market strong, these factors may help kickstart a bull run.