Yesterday marked one of the most anticipated Reserve Bank of Australia (RBA) meetings in recent months.
Speculation was swirling whether RBA governor Dr Philip Lowe would induce a 'taper tantrum' on the share market by hinting that its unprecedented levels of monetary stimulus would start to be wound back.
The phrase 'taper tantrum' entered the investing vernacular back in 2013. Back then, the chair of the US Federal Reserve Ben Bernanke hinted that the US's quantitative easing (QE) programs would have to be unwound. The share market plunged on the news, and the 'tantrum' was born.
But there are no signs of a tantrum on the ASX today, quite the opposite in fact. At the time of writing, the S&P/ASX 200 Index (ASX: JXO) looks set to finish the trading day up a healthy 1.1% to 6,840 points, close to a new post-coronavirus crash high. Why? You guessed it, Dr Lowe didn't exactly make investors' worst fears come alive yesterday.
RBA doubles down on QE
Contrary to the rumours, the RBA has doubled down on stimulus and QE. It announced that far from winding up Australia's first QE program, it would double it. The RBA will initiate another $100 billion of government bond purchases when the current QE program winds up in April, with the RBA set to buy $5 billion worth of bonds every week.
Even though Dr Lowe is pleased that the progress the Australian economy is making in the face of the coronavirus-induced recession, it has decided that more assistance is necessary. Here's some of what he had to say yesterday:
The board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off…
The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest.
Today, the Australian Financial Review (AFR) reports that Dr Lowe subsequently stated that a partial reason behind these moves is also to depress the Australian dollar. Since other central banks around the world have also been pursuing ultra-easy monetary policy, failure to match these policies puts upward pressure on our currency. And that's something the RBA does not want since it dampens export competitiveness.
So what does all of this have to do with ASX shares?
Fuel to the ASX fire
Well, quite a lot. The share market prices companies based on their profits, and the potential to keep delivering and growing said profits.
But another factor in market price discovery is risk versus reward. And with near-zero interest rates and an expanding QE program, the RBA is ensuring that there are no risk-free alternatives to shares.
QE programs deliberately lower the yields investors can expect from 'risk-free' government bonds. This phenomenon directly cascades into other 'safe' investments like bank accounts and term deposits. Have you wondered why your savings account used to give you 4%, but now offers 1% if you're lucky? Low interest rates and QE are responsible.
So because investors have almost nowhere else to turn for a real return on their cash, the share market and property markets are where most investors find themselves turning to. That's probably why our share market has all-but shaken off the coronavirus pandemic and is today higher than it was in January last year before the virus even struck.
Same with the property market. Over in the US, the S&P 500 Index (INDEXSP: .INX) is more than 13% higher today than where it was at its pre-pandemic peak.
Party at Phil's
And the RBA has just all-but promised that it will keep the stimulus taps open… until 2024! Nothing is guaranteed in investing of course. But this strongly indicates that the ASX 200 has just been given the green light to push even higher. If any 'taper tantrum' is only coming in 2024, then there's not much that will stand in the way of rising asset prices until then.
William Martin, a former chair of the US Federal Reserve, famously once said that, "the Federal Reserve's job is to take away the punch bowl just as the party gets going". Well, Dr Lowe has just rolled out a few kegs for the ASX. Let's see how long this party lasts.
