It was a busy week that saw the US Federal Reserve meet to discuss monetary policy. The expectation was for a steady hand on the tiller, and they did not disappoint. Monetary policy is to remain static, with interest rates at historically low levels and the quantitative easing programme at historically high levels.
It was stressed by Chair Jerome Powell that this was not the time to be talking about scaling back bond buying. However, there was an upgrade to the outlook for the US economy. Continued progress on vaccinations, improving indicators of economic activity, and a strengthening in employment, all led the Federal Reserve to update their rhetoric. Single words matter and in March they expressed pandemic risks as “considerable”, and this word was removed in their recent commentary.
To underline the outlook for the US, the country’s official economic data was released showing an annualised growth rate of 6.4% for the first three months of 2021. Growth data typically takes a month to be collated and calculated, so it is always busy the month after the end of the quarter. The continuing level of stimulus and easing of lockdown restrictions have given a boost to the recovery. Despite the speedy upturn, President Joe Biden continues to put pressure on Congress to approve his expanding agenda.
Having now passed 100 days as President, the volume of stimulus that he wants to approve continues to rise. In March, the $1.9 trillion American Rescue Act was passed, now we have the $2.3 trillion American Jobs Plan, which has been designed to upgrade the US’s failing infrastructure, and the $1.8 trillion American Families Plan, which looks to improve workers’ benefits.
The obvious risk, with such stimulative monetary and fiscal policies in place, is that the US economy could overheat. This does increase the likelihood of a spike to inflation levels, albeit short-lived, and would demand an appropriate policy response. This is something we are keeping a close eye on.
On the other side of the Atlantic, the Eurozone slid into a double-dip recession. The output in the first three months of 2021 dropped, as the weight of continued lockdown measures and a stuttering vaccine programme left them lagging behind other developed economies. The -0.6% fall for the first quarter followed a -0.7% drop for the last quarter of 2020 creating a technical recession for the Eurozone. This backdrop demonstrates why we are currently underweight in European equities.
In the UK, consumers are embracing the reduced lockdown measures, particularly at pubs, which has seen craft and premium beers being added to the growing list of items that are hitting supply constraints. Do not underestimate the power of pent-up demand, supported by substantial savings, that we have witnessed during this lockdown.