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Goldilocks to be disturbed by a more aggressive Fed?

Peter Warnes  |  02 Mar 2018Text size  Decrease  Increase  |  
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We often hear and see the word "goldilocks" used to describe conditions in financial markets or economies. In the years after the GFC, the actions of global central banks created a goldilocks-type environment.

Investors have become enamoured with the inference of "not too hot, not too cold, but just right," leading to high levels of complacency and low market volatility. Markets have surged to record levels.

Perhaps it is worth noting the Goldilocks story involved bears. When the bears discovered Goldilocks sleeping in baby bear's comfortable bed with a belly full of warm porridge, she was shaken from her complacent surroundings, screamed "Help," and ran for the exit.

The lesson to be learned--always make sure you read the story to the end, and in case of a surprise, have an exit close by. Ensure when the bears, claws extended, return to financial markets as they will, you are prepared and won't have to cry "Help".

Could Powell's "gradual" include four gradual increases in 2018?

The chairman of the US Federal Reserve Jerome Powell provided a relatively optimistic outlook for the US economy in his maiden testimony to the House Financial Services Committee but pointed to balanced risks to the strong outlook.

In his prepared speech, he largely stuck to his predecessor's mantra of a cautious approach and reiterated earlier policy guidance of gradual increases in official interest rates, in line with the December Dot Plot.

In response to questions he did, however, acknowledge recent data had boosted the case for near-term hikes. Financial markets have priced in a 25-point increase at the next meeting of the Federal Open Market Committee (FOMC) on 20-21 March.

Powell admitted in three weeks every member of the FOMC will submit "their projection of what they feel is going to happen to the economy and their projection for appropriate monetary policy". At the December meeting the median participant called for three rate increases in 2018.

Since then, incoming data suggests the economy has strengthened and there has been a major increase in fiscal stimulus. Powell refused to prejudge what the new rate path may look like, but markets are slowly moving toward the possibility of four increases in 2018.

The Fed chairman brushed aside any suggestions the recent spike in market volatility would have an impact on the economy. He pointed to the tailwinds of favourable trends in consumption and business investment, and more stimulatory fiscal policy since December.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


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is Morningstar's head of equities research.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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