The market volatility that began last Friday with the news of the Omicron variant continued on Tuesday after comments from Federal Reserve Chairman Jerome Powell. Powell signaled in testimony to Congress that the Fed will consider accelerating the pace of tapering bond purchases at its next meeting in December with a view to concluding bond purchases (known as quantitative easing) a “few months sooner” than currently planned, in spite of the emergence of the Omicron variant. In acknowledging the high level of inflation, Powell also added that it was time to retire the term ‘transitory’ to define the spike in prices since it appears likely to persist at an elevated rate for a more extended period of time than originally forecast.

We reiterate our stance on staying the course with long-term investment plans and have the following observations.

Powell’s comments suggest the Fed’s primary focus is now on the risk of more persistent excess inflation, which Omicron might aggravate, and not downside risks to economic activity from the variant. However, Powell qualified his statement by observing that the FOMC would learn more between now and the December Fed meeting including with respect to the variant and its risks to the economy.

Importantly, the Powell-run Fed has proven to be highly data dependent, including heading market stress signals, throughout his tenure. The currently very accommodative monetary policy was in reaction to pandemic-induced financial stresses and we expect normalization of interest rate policy to only occur in unison with further strong economic readings (which created the inflationary pressures) and relatively low financial stress readings. This implies higher interest rates only in response to a healthy economy (that supports profit growth and ultimately stock prices) that is capable of handling higher interest rates.


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