FOMC Chair Powell answers a reporter's question. Image source: Official FED Photо
Jerome Powell, the Chairman of the Federal Reserve in the United States, held an important speech for the Peterson Institute for International Economics yesterday, which was focused on the nature of the currently evolving economic recession.
He delineated on the scope and size of the comprehensive monetary policy that has been advanced by the FED from the outset of the global pandemic. This was meant to underline the measures that are put in place to stimulate recovery after the general risks from the epidemic eventually are mostly lessened.
Powell also talked about the nature of the evolving market recession, which he attributed solely on the fallout from the coronavirus.
"The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War 2. […] There was no economy-threatening bubble to pop and no unsustainable boom to burst. The virus is the cause, not the usual suspects."
Yet, it was his remarks concerning the unpredictability of the future that jolted the markets in the aftermath of his speech.
From his tone, it could be discerned that FED's economic models are especially unreliable now in light of the hastily changing environment, which might prompt the Bank to adjust the policy as the conditions alter.
"While the economic response has been both timely and properly large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks."
These comments caused many investors to question whether the recent market gains have been driven purely on traders' speculations, without any inherent reasons.
The advances in the stock market, in particular, are now being questioned, with many investors fearing that the recent rally could have resulted in an excessive overvaluation of many stocks.
A prime example of the substantial gains that have been registered recently can be found the US tech sector, represented by the Nasdaq. The index has even managed to advance on a yearly basis in 2020, thereby completely invalidating the COVID-19 selloff from early March.
These fears of overpricing in the stock market led to a massive dropdown in government treasuries' yield, as investors scrambled towards the bond market once again.
If investors' confidence remains muted and these trends persist over the following days and weeks, the prevailing market sentiment can turn ostensibly bearish yet again, thereby putting to a halt the establishment of the recent bullish correction.
Stocks vs Bonds Comparison Chart. Image source: Trendsharks ©, created with TradingView.com
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