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LGT Navigator: Fed-Powell announces shift in US monetary policy

August 28, 2020

At the Jackson Hole central bank video conference, US Federal Reserve Chair Powell announced a monetary policy realignment, which in essence means ultra-low interest rates for a long time to come. The Fed's announcement created some tailwind on stock exchanges. However, at the same time, increasing tensions between the US and China are weighing on investor sentiment. The tone has intensified significantly following a military incident in the South China Sea, causing increased nervousness in the financial markets.

Fed-Powell announces shift in US monetary policy

The summit meeting of the central banks opened yesterday with the eagerly awaited speech by US Federal Reserve Chairman Jerome Powell. At the annual summit of central bank leaders, which is normally held in Jackson Hole, Wyoming, but is virtual because of the corona pandemic, the Fed Chair announced a new direction for US monetary policy. In the future, the Fed will focus primarily on the labor market and interpret the previous concrete inflation target of 2% more flexibly, or rather orient itself to an average value. According to this, the inflation rate could remain above the target value for a longer period of time – in technical jargon this is called “Average Inflation Targeting“. As a result, key interest rates in the US are likely to remain at record lows for some time to come, at least until the goal of full employment is reached.

On Wall Street, the Fed's strategy adjustment announced at the Jackson Hole central bank symposium provided some tailwind. As a result, the Dow Jones Industrial rose by +0.57% to 28 492.27 points. The S&P 500 closed moderately +0.17% higher at 3 484.55 points, while the technology-heavy Nasdaq 100 briefly broke through the 12 000 mark for the first time, but then closed -0.38% lower at 11 926.16 points. The prospect of a long phase of low interest rates in the US also led to price gains on Asian equity markets.

Has the US economy survived the worst?

Projected over the year, the collapse of US gross domestic product in the second quarter was -31.7% (previous estimate -32.9%). According to the data of the Department of Commerce in Washington, private consumption slumped by around -34% and American exports even dropped by -63% in the period mentioned. After the historic economic slump, most market observers expect the world's largest economy to recover. In view of the continuing spread of the pandemic, however, this seems questionable. At least the latest data from the US labor market has improved slightly. For example, the number of weekly reported data on initial jobless claims in the United States fell. A total of 1.006 million Americans made an initial application last week, compared to 1.1 million the week before.

ECB cannot accept a long-term failure to meet the inflation target

Speaking at the Jackson Hole Symposium, ECB Chief Economist Philip Lane said that the European Central Bank (ECB) should not simply accept inflation rates below its target. A prolonged period of lower inflation rates could lead to this becoming firmly established. This would be costly, he said, because lower inflation and lower inflation expectations raise real interest rates and are not good for economic recovery. The economic shock of the corona pandemic is also a negative shock for inflation dynamics, Lane said. The ECB would therefore be prepared to adjust all its instruments if necessary.

Swiss economy should have bottomed out

The State Secretariat for Economic Affairs (Seco), on the basis of the data on economic development published yesterday, is confident that the domestic economy reached its low point during the second quarter. In the current third quarter, the economy is expected to return to its growth path, but Seco commented that the pre-crisis level is not expected to be reached again until the end of 2021. As a result of the lockdown, Swiss GDP collapsed by -8.2% in Q2 compared with the first quarter (-2.5%). In an international comparison, Switzerland has thus fared better than the euro zone (-12.1%) and the USA (-8%). For 2020 as a whole, Seco nevertheless expects the worst recession in 45 years.



Economic Indicators August 28

MEZ Country Indicator Last
08:00 GE GfK Consumer Climate (September) -0.3
08:45 FR GDP Q2 (q/q) -13.8%
08:45 FR Consumer Prices (August, y/y) +0.9%
09:00 SZ KOF Economic Indicator (August) 85.7
10:00 IT Economic Sentiment (August) 76.7
10:00 IT Business Climate (August) 85.2
10:00 IT Consumer Confidence (August) 100.0
11:00 EZ Economic Sentiment (August) 82.3
14:30 US Consumer Spending (July, m/m) +5.6%
14:30 US Personal Income (July, m/m) -1.1%
14:30 US PCE Core (Inflation) Index (July, y/y) +0.95%
16:00 US Uni Michigan Consumer Confidence (August) 72.8

Earnings Calendar August 27

Country Corporate Period
SZ Kaba Holding Full Year


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Source: LGT Bank (Switzerland) Ltd.

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