US Federal Reserve chair Jerome Powell. Picture: REUTERS/KEVIN LAMARQUE
US Federal Reserve chair Jerome Powell. Picture: REUTERS/KEVIN LAMARQUE

For the rest of us, according to Jeffrey Halley, a senior market analyst at Oanda, the “flood of money means that the disconnect between equity markets and the real world is set to continue for some time to come”.

He was responding to dovish comments from some of the world’s leading central banks such the US Federal Reserve, the Bank of Japan, and policymakers in Australia and New Zealand. Jerome Powell, chair of the Fed, started it last week with a policy shift that means rates will stay lower even if the economy improves.

Instead of pursuing a straight target of getting the inflation rate to 2%, it will now aim for an average, and will take into account previous periods of its undershooting so that hitting the target doesn’t mean an automatic rates increase.

Even after a decade of near zero interest rates and quantitative easing, which saw the Fed add $3-trillion to its balance sheet in the latest round of monetary stimulus in response to the pandemic, inflation is running at half the target, so it’s going to be a long time before US rates rise.

The Fed also changed its approach to the jobs mandate, meaning it won’t act immediately when unemployment falls and will instead focus on achieving maximum employment.

There are many criticisms to be made about the policy, including that it implies policymakers doing more of what had been ineffective for more than a decade, in the hope that it will suddenly work. And it also runs the risk of overstating the Fed’s ability to rein in inflation once it exceeds hits 2% for “some time”.

Some argue that the assumption it can simply turn the tap off at its time of choosing then see prices behave accordingly may be naive.

With the Fed buying everything from AAA rated US bonds to speculative paper issued by companies that may have hit the wall by now, it’s anyone’s guess what kind of bubbles and distortions are being built into the system.

That’s why the biggest economic depression since the 1920s is going hand in hand with record-high equity prices, and investors are rightly nervous about how it will end. For a nation that prides itself as being at the centre of a free-market system to have a monetary policy that preserves “zombie” companies that would otherwise fail aid is something few would have predicted.

But what is certain is that monetary policy will stay loose for a while. CNBC reported this week that the US could have zero rates for five years or longer due to the policy shift. That implies a weaker dollar as investors favour higher-yielding currencies.

Which brings into question how SA investors should respond, especially when making decisions about whether to increase their offshore holdings. There’s a view that overseas stocks are the place to be despite the buying opportunities presented by the spectacular declines in the JSE. If you miss an upside locally or US shares disappoint, you’d have the rand — a reliable one-way bet — to help you.

Others argue that the Fed’s policy stance implies that this strategy could backfire if there is a sustained recovery in the rand because of loose monetary policy in the US. 

But recent history would suggest that a consistently stronger rand isn’t something one should count on, irrespective of policy in developed markets. While the rand is about 1.5% stronger since Powell spoke last week, this has been a period of elevated volatility in which it traded between R16.54/$ and R17.10$.

The Fed has been broadly loosening policy for a decade and the rand ended weaker in six of those years, having ended 2010 at R6.63/$. The dollar was also not particularly weak, with a broader index of the world’s foremost reserve currency dropping in just two out of 10 years in the period to 2019.

That’s because other countries struggled even more with weak economies, with falling consumer prices leading to negative rates in other countries. Over time, what matters is economic growth.

SA’s dire economy and fiscal metrics mean the rand is likely to remain a laggard.

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