D-Street cheers Fed goal shift on inflation; low rates to sustain liquidity

Mumbai: Asset managers were relieved after US Federal Reserve Chairman Jerome Powell announced a radical policy shift in the inflation goal, saying the US central bank was willing to allow inflation to rise, to support the labour market and the economy. The ‘average inflation target’ marks a shift from the Fed’s strategy to achieve 2 per cent annual inflation growth, and this also implies that low interest rates are going to stay in the US economy for a very long time.

Investors heaved a sigh of relief, as these comments will have a bearing on global risk appetite, influencing foreign fund inflows into emerging markets such as India, that have also seen prices soaring amid a gush of liquidity even as Covid-19 pandemic dented economic growth.

“Fed will allow inflation to rise, and that is something that markets were largely anticipating. Inflation had been low for a long time. Markets can be a little more relaxed as they are already talking about keeping interest rates low for a long time,” said Mahindra Jajoo, CIO for debt at Mirae Asset Management.

“One concern was, would rising inflation change Fed’s stance? The current statements give comfort to markets, as Fed is continuing with the easy money policy. This is a positive development for markets,” he added.

Lakshmi Iyer , CIO -debt & head of products at Kotak Mahindra Asset Management, also welcomed the move. “Rates won’t go up in a hurry as they are more tolerant to inflation now,” she said.
Markets, which have completely been driven by liquidity, ignoring economic uncertainties, rejoiced the prospects that ample liquidity is here to stay for long.

US stocks advanced in reaction to Powell’s comments. The Dow Jones Industrial Average rose nearly 1 per cent in first two hours of trade, turning positive on the year for the first time since a coronavirus-led slump in March. The S&P 500 was up 0.46 per cent, at 3,494 and the Nasdaq Composite up 0.13 per cent, at 11,679.

The Fed chief said even though higher prices of essential items such as food, gasoline and shelter add to the burdens faced by many families, if inflation is persistently too low, it can pose serious risk to the economy.

Talking of Indian markets, foreign institutional investors have pumped in over Rs 40,000 crore in Indian markets in August alone, in addition to an aggregate Rs 43,934 crore that flowed in the previous three months.

Fed also explicitly acknowledged the challenge of persistently low interest rates, and said it woukd undertake a public review of policy strategy every five years.

Even as the strong guidance was welcome, there was some skepticism.

“The Fed has given a strong forward guidance. They also don’t seem to be concerned about liquidity leading to asset price inflation,” said Navneet Munot, CIO of SBI Mutual Fund.

“Whether they are complacent on the inflation front as well as implications of rising asset prices in the face of unprecedented money printing and ballooning US government debt, only time will tell,” he added.
Credit: Stocks-Markets-Economic Times

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