Stocks may have another reason to rally.
According to MKM Partners’ Michael Darda, the risk of a monetary policy mistake at the margin is lower now than it was just yesterday.
His call follows Federal Reserve chief Jerome Powell’s speech at the virtual Jackson Hole, Wyoming, economic summit on Thursday.
“The Fed is focused like a laser beam on supporting the recovery and making sure they eventually get back to their 2% inflation target,” the firm’s chief economist and macro strategist told CNBC’s “Trading Nation.”
Powell’s speech included a historic change in the way the central bank views full employment and price stability, otherwise known as the dual mandate which has been followed since 1977.
“They won’t be tightening policy if inflation is below their target simply because the labor market is perceived as tight,” said Darda. “That was probably the most fundamental change that we saw.”
Darda, who came into the year cautious on the economy and the market, now considers himself constructive. He cites strong monetary and fiscal support for optimism.
“If we just look at the last three full months of data that we have, this economy started to turn much sooner than anticipated in over the May, June and July period,” he noted. “The upturn has been much more forceful, whether that’s been employment or sales, production — obviously the housing statistics have been off the charts.”
As for the labor markets, Darda predicts the comeback from the coronavirus will slow.
“It’s not a perfect V. We’re not recovering exactly as quickly as we fell off in terms of employment,” he said. “Although, I would say that data is at the margin encouraging. The average for August on initial claims is running below the July average. So, that means the labor market is continuing to recover here.”
However, his time horizon for a full recovery in employment isn’t this year or even next year.
“We’re giving a pretty wide range. I’m thinking one to three years,” Darda said. “It sounds like a long time, and it is a long time — but it’s not a lost decade.”