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FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell (REUTERS)
FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell (REUTERS)

Greedy investors give the US Fed a thumbs down, eye more stimulus

  • Asian markets ended in the red and European stocks began Thursday’s session  on  a  bad  note
  • Analysts say that the markets had already priced-in an ultra low interest rate scenario

The US Federal Reserve has said that it would keep interest rates low at least until 2023. Ideally, prospects of lower rates for a prolonged time period should have led to more buying in equities.

However, that was not the case on Thursday. Asian equity markets ended in the red and European stocks began Thursday’s session on a negative note. US equities also seemed to give a cold shoulder to the Fed.

“That interest rates would remain low for a prolonged period was already baked-in by the market. Increasingly, the view among global investors is that the fiscal response to tackle the pandemic has been comparatively laidback. Investors feel more fiscal firepower is required to bring the economy back on track, than monetary measures. Powell’s comments have confirmed this view, raising expectations of more stimulus," said an analyst with a multinational brokerage firm requesting anonymity.

Stimulus  boots
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Stimulus boots

On Wednesday, Fed chairman Jerome Powell said the central bank still had many tools to manage the crisis. However, certain areas of the US economy will continue to struggle in the absence of more stimulus.

“So, markets always want more and while risk assets might love the intravenous drip of monetary stimulus, it is time to focus on policies that the real economy needs, and for that, Powell is dead right, it’s time for Congress to step up to the plate," Robert Carnell, regional head of research, Asia-Pacific, ING, said in his blog on 17 September.

The hope of more stimulus from the government has only increased after US President Donald Trump in a tweet urged the Republicans to embrace a larger coronavirus stimulus package. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by Trump on 27 March 2020. This more than $2 trillion economic relief package aims to protect the US economy from the after-effects of the coronavirus crisis.

“US equities sold off badly yesterday (Wednesday), perhaps as a sell-the-fact reaction to the Federal Open Market Committee meeting," said John Hardy, head of forex strategy at Saxo Bank.

Trump indicated that he would like to arrive at a consensus with the Democrats over the size of the stimulus, according to Hardy.

“He (Trump) and his party will need to do so very soon to make any impact on the economy and sentiment ahead of the US election on 3 November," Hardy said in a note to clients on 17 September.

The hope is that with polls looming, Trump would want to sign off on a large package to please US citizens. With that on the horizon, investors are unlikely to be impressed by Powell’s accommodation.

Meanwhile, as per the latest global fund managers survey by Bank of America, the US election is the third biggest tail risk for equities.

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