Federal Reserve Policy and Economic Updates
Photo Credit: Alexander Grey
Monthly Market Summary
The S&P 500 Index of large-cap stocks returned 3% during August, while the Russell 2000 Index of small-cap stocks returned 2.2%.
Financials were the top performing sector during August, returning 5.1% as the 10-year Treasury yield rose by 0.1%. The energy sector was the only sector to trade lower during August, declining -2% as oil prices fell -7.4%.
Investment grade bonds produced a -0.3% total return compared to high yield bonds’ 0.6% total return.
US Style % Returns in August 2021
US Sector % Returns YTD
Federal Reserve Provides Monetary Policy Update
The Federal Reserve held its annual Jackson Hole meeting on August 27th. Fed Chairman Jerome Powell’s speech made a case for the Fed to start reducing its monthly bond purchases, which were begun during the pandemic to keep interest rates steady, increase bond market liquidity, and keep credit flowing. He said the Fed had made progress toward its average inflation goal of above 2% and maximum employment in the U.S. labor market. While Powell laid the groundwork to start tapering (i.e., reducing) the Fed’s monthly bond purchases, he went to great lengths to make it clear tapering is separate from raising interest rates. He warned that raising interest rates to tame inflation pressures could disrupt the recovery and said the COVID-19 delta variant poses a risk to the economy.
Financial markets were anxious leading up to the Jackson Hole meeting. The last time the Fed reduced bond purchases in 2013, investors threw what came to be called a "taper tantrum" out of fear that the Fed would remove support too soon and stall the recovery. This time, Chairman Powell's speech appears to have settled investors' jitters. His tightrope act provided advance notice of the Fed's intent to reduce monthly bond purchases, which markets already believe are providing limited benefit, but reassured investors that interest rates will remain low to support the recovery.
Economic Data Decelerates as Pandemic Disruptions Create Friction
Recent economic data indicates the COVID-19 recovery is moderating. The incoming data paints a picture of an economy reverting back toward pre-pandemic trends amid supply chain disruptions and labor shortages. Regional manufacturing surveys from Federal Reserve bank branches in Dallas, Kansas City, New York, Philadelphia, and Richmond missed the market’s estimates during August. The U.S. Census Bureau reported July retail sales declined from June, while the National Association of Realtors announced July housing starts declined -7% compared to June. While the data is cooling, it does not indicate an imminent economic slowdown. Even after falling from June levels, retail sales and housing starts both remain well above pre-pandemic levels. The recovery will continue to be bumpy, and the data will be lumpy, but the economy is forecasted to keep making positive progress in the months ahead.
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