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July 16, 2021

Jerome Powell disappointed investors

 US stock markets closed mixed yesterday. There was no single dynamic. The Dow Jones Industrial Average added 44 points (0.13%) at the close and amounted to 34933 points. The Standard & Poor's 500 index gained 5 points (0.12%), showing an increase to 4374 points. The Nasdaq Composite index fell by 32 points (0.22%) to 14,644 points. Thus, the changes were insignificant.


However, the US markets may already be more active today. Last night, the first of two speeches by Fed Chairman Jerome Powell to Congress took place. Many were waiting for new hints from Powell about curtailing the quantitative stimulus program, as the latest inflation report clearly showed that prices in the United States continue to rise.


The consumer price index in June was already as much as 5.4% YoY, although experts predicted a reduction to 4.9% YoY. Thus, we can partly conclude that the Fed's forecasts and expectations have not yet come true. Inflation rose to its 13-year highs. On the one hand, such growth can be considered logical in the conditions of a post-pandemic. Given how much money the Fed has sent to the economy, it was not necessary to expect anything else. On the other hand, this explanation does not make it easier for investors.


Powell has repeatedly stated that the jump in inflation will be temporary, since the low "base" of last year and rising energy prices are the main reasons for the price increase. Powell also stated many times that the Fed will not look only at inflation indicators when discussing the revision of monetary policy parameters.


Yesterday, the head of the Fed confirmed all the theses that he expressed earlier. According to Powell, the US economy still needs monetary stimulus, and the labor market is still very far from its pre-pandemic levels. Therefore, the Fed will not change its monetary policy in the near future and start curtailing the quantitative stimulus program. The head of the Fed noted that the economy continues to recover at a good pace, but there is still an unevenness in the recovery. Powell also noted that the goals set by the Fed have not yet been achieved and they are still very far away.


It can be recalled that the US central bank wants to achieve the maximum level of employment and price stability. The head of the Federal Reserve expects that in the near future the number of jobs in the country will continue to increase due to high rates of vaccination and a decrease in social tension due to the pandemic. On the account of inflation, the head of the Fed said that it is likely to remain quite high for the next few months before it starts to decline. Thus, the rhetoric of the Fed chairman, as we expected, has not changed. The Federal Reserve will continue to adhere to an ultra-soft monetary policy until "it sees significant progress". Today (especially during the US trading session), US stock indexes may react with a fall to this performance. The US dollar may also fall slightly in price.