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Fed picks its side in inflation debate and sends market a message — no rate hikes for years

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Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, Jan. 29, 2020.

Andrew Harrer | Bloomberg | Getty Images

The Fed does not expect to see inflation pick up for years, and it is willing to keep rates at zero even after it does.

Stocks initially surged after the Fed released its post-meeting statement and its latest economic forecast, showing it will keep interest rates at zero at least through 2023, as expected. Stocks gave up their gains as Fed Chairman Jerome Powell briefed the media, and described the Fed’s guidance as strong and “powerful.” 

“He’s the great and powerful Oz. Investors got duped. They thought enhanced forward guidance meant something, but when they peeked behind the curtain they realized the Fed didn’t do anything, and the market rolled over,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Treasury yields moved slightly higher after Powell said the Fed plans to keep its asset purchases at current levels for now. Some bond market pros have been expecting the Fed to increase Treasury purchases, and Powell did not commit to that. The 10-year Treasury yield rose to 0.695%.

“We’re going to continue to monitor developments, and we’re prepared to adjust our plans as appropriate,” Powell said.

But it was the Fed’s guidance that markets found dovish. In the Fed’s latest projections, core inflation is expected to stay low and not reach the Fed’s 2% target until 2023. At the same time, the job market is expected to improve to the point where unemployment is at 4% in 2023, below the longer run rate of 4.1%.

“This is dovish – lower rates for longer, higher equities, weaker dollar,” said Jon Hill, senior fixed income strategist at BMO. “The Fed is saying we’re not hiking in 2023, maybe in 2024 … What they’re saying is these are our goals. We expect to have just barely met them and even then, they’re not raising rates.”

The Fed last month announced a change to its policy, where it will now let inflation run above its target for some time before it moves to raise rates. But in the central tendency of Fed forecasts, the Fed sees core inflation running below 2% through 2022. It expects core PCE inflation at 1.3% to 1.5% this year, and 1.6% to 1.8% next year. The pace reaches 1.9% to 2% by 2023.

 But AB economist Eric Winograd said Powell may have undercut the dovish message he was sending.

“He noted that targeting an inflation overshoot for ‘some time’ as the statement says, means that they are not targeting a ‘sustained’ overshoot. So how long is ‘some time’ if it isn’t sustained?'” Winograd said. “That imprecision is a problem that the committee is going to have to solve to reap the full benefits of the framework shift. It’s not a coincidence that the stock market, which had been in positive territory, flipped negative after the chair’s comments.”

Powell said the Fed expects inflation to ultimately improve. 

“That’s very strong forward guidance, and we think that will be durable guidance that will provide significant support for the economy,” he said.

While some Wall Street strategists and investors believe inflation could become a problem, the Fed has said it is more concerned about disinflation.

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buy gold as prices weaken, says UBS Wealth Management

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Gold bars being cast at a plant by Gulidov Krasnoyarsk Non-Ferrous Metals Plant in Russia.

Kirill Kukhmar | TASS | Getty Images

SINGAPORE — Investors should be putting their money in gold now, as it represents a “very good hedge” ahead of risk events such as the U.S. election, UBS Global Wealth Management told CNBC.

“We like gold, because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year,” according to Kelvin Tay, the firm’s regional chief investment officer, on Tuesday.

“And gold has certain hedges to it,” Tay said. “In (the) event of uncertainty over the U.S. election and the Covid-19 pandemic, gold is a very, very good hedge. And its recent weakness represents a great entry point for investors,” he added, speaking to CNBC’s “Squawk Box.”

Gold prices have shot to record highs this year — and surpassed $2,000 per ounce for the first time in history. Recently, however, prices have dipped again and last traded at around $1,880 per ounce as of Tuesday afternoon during Asia hours.

The precious metal is also attractive due to the low interest rate environment, Tay pointed out.

If interest rates stay low as the Fed has indicated, the opportunity cost of holding gold — a non-yielding asset — will be “quite low,” he added. That’s because investors are not forgoing interest that would be otherwise earned in yielding assets.

Tay also recommended that investors put some money into Chinese government bonds as they are set to be included in major index provider FTSE Russell’s World Government Bond Index. The inclusion, from October 2021, is set to bring billions of dollars of inflows into China.

Tay pointed out that Chinese government bond yields, at 2.5%, are higher than other regions, compared to U.S. yields at 0.6% and European yields at largely negative levels.

“This is really high returns for a very good quality government with very strong balance sheets,” he said.

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Irish schools harnessing solar and smart tech to measure energy use

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Microsoft’s Irish unit is working with a utility firm on a renewable energy scheme that will involve the installation of internet-connected solar panels on the rooftops of schools in the country. 

The project, with SSE Airtricity — a green energy provider and subsidiary of Scotland’s SSE — encompasses 27 schools spread across the Irish provinces of Leinster, Munster and Connaught.

In an announcement Monday, SSE Airtricity said internet of things technology would be harnessed to connect the panels to a cloud computing platform from Microsoft. Within the schools, digitally connected screens have been set up to let pupils follow energy usage information in real time.   

An investment of nearly 1 million euros ($1.17 million) from the Microsoft Sustainability Fund will fund the program.

While the installation of solar panels will help the schools to offset carbon dioxide emissions, there is a wider aspect at play that could have consequences further afield.

In its statement, SSE Airtricity said the software tools would be used to “aggregate and analyze real-time data on energy generated by the solar panels.”

This, it added, would demonstrate “a mechanism for Microsoft and other corporations to achieve sustainability goals and reduce the carbon footprint of the electric power grid.”

The use of renewable energy technologies on buildings designed for education is not unique to the Republic of Ireland.

Earlier this year, Norwegian firm Veidekke was tasked by the city of Oslo to build an energy-efficient, solar-paneled school in Norway.

According to Veidekke, the school — which is set to cover around 14,000 square meters and is slated to be finished before the 2023 academic year begins — will have solar panels on both its façades and roof.

Over in the U.K., the University of Plymouth is one of many institutions to use a Building Management System, or BMS, to both monitor and control things like lighting and the energy used by devices in its buildings.

According to the institution, its BMS “controls 95 percent of our campus buildings, ensuring intelligent control of the building systems to make sure there’s no energy waste.”

The development of sustainable learning environments is not solely reliant on tech, either. In 2019, a 200-foot long “green pollution barrier” was installed at an elementary school in Sheffield, northern England. The idea behind the BREATHE barrier, as it’s known, is to act as an air pollution filter from road traffic.

 

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Nikola shares slide after second sexual abuse allegation raises questions about GM deal

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