Prospects for monetary easing by the U.S. Federal Reserve underpinned global equity markets last week, driving the Dow Jones Industrial Average to a record high, while closing above 27,000 for the first time. The catalyst for the rally was Fed Chairman Jerome Powell’s dovish testimony to Congressional sub-committees on July 10 and July 11. The Fed chief conveyed that the case for more accommodative policy had strengthened since the last central bank meeting on June 18-19, further solidifying expectations for a rate cut at the end of the month.

Last week, the benchmark S&P 500 Index settled at 3013.77, up 0.8%. For the year, it’s up 20.2%. The blue chip Dow Jones Industrial Average finished at 27332.03, up 1.5%. It’s up 17.2% in 2019. The tech-based NASDAQ Composite closed at 8244.14, up 1.0%. It’s gained 24.2% this year.

Help for equity investors also came from the European Central Bank (ECB). A few policymakers strongly suggested last week that the central bank is seriously considering injecting fresh stimulus into the economy through interest rate cuts, or the relaunch of quantitative easing.

Why Did Powell Shift Gears?

Ahead of Powell’s testimony, the biggest thing investors were hoping for from the Fed chief was clarity. No one wanted to hear ambiguity. His choices were cut or no cut. No one wanted to hear, “We’re still looking at the data.”

The hawks were standing their ground ahead of Powell, saying a rate cut at the end of July was unnecessary because of the strength of the labor market, and moderately weak inflation. They looked at the U.S. economy as “not too hot” or “not too cold”. Powell, however, was pretty firm when saying there are concerns about inflation, a global economic slowdown and rising trade tensions. He also added low business investment to the mix of reasons why the Fed should take out “insurance” to sustain the current economic expansion and the continuation of the bull market.

What’s Good about the Economy May also be What’s Bad about the economy

If you asked someone about 10 years ago, “Would you take an economy driven by solid consumer spending, unemployment at 50-year lows, modestly growing wages, and low interest rates? They probably would’ve taken it with both hands. However, this doesn’t seem to be enough for Powell and his FOMC policymakers.

Powell sees risk to too low inflation because it’s too close to deflation. This occurs when demand for goods and services weakens, causing consumer and producer prices to fall. Powell is probably worried that deflation will cause a recession.