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The Fed: Powell unlikely to fire starting pistol for tapering at Jackson Hole

Federal Reserve Chairman Jerome Powell will be able to equivocate about when the central bank will start slowing down the pace of its bond-buying, essentially signaling a delay until November, economists said Monday.

The Fed chairman “can do a ‘on the one hand and other the other hand,’ leaving you with the sense he’s not going to fire the starting pistol at the September meeting,” said Vince Reinhart, chief economist at Mellon.

Powell is expected to emphasize the risk management and repeat that the delta strain’s impact remains unknown.

Powell’s messaging is helped by the fact that the Jackson Hole, Wyo., retreat was switched to a virtual single-day meeting on Friday instead of the traditional two-day event marked by Western-attire dinners, fishing and hiking, after a spike of recent COVID-19 cases in western Wyoming.

“It’s kind of hard for a central banker, who is meeting virtually with his colleagues because of a health risk, to assert that it’s time to start slowing policy accommodation without acknowledging the health risk that can affect the economy,” Reinhart said.

But Fed watchers think that the central bank will announce tapering, and launch it, before the year is out.

“I view them as quite likely to taper between now and the end of the year, irrespective of delta,” said Adam Posen, president of the Peterson Institute for International Economics.

The exact timing doesn’t matter much “unless you’re a day trader,” Posen added.

Dallas Fed President Rob Kaplan, a strong advocate of slowing down asset purchases, said last week that he might rethink his push for a September announcement given the spread of the delta variant.

Read: Delta deals blow to economy, Markit survey data show

The Fed is buying $120 billion of Treasurys and mortgage-backed securities each month. The taper is not a tightening. The gradual slowing of purchases is expected to last for at least six months, meaning the Fed will still be accumulating bonds and maintaining an easy policy stance.

The Fed’s benchmark interest rate is near zero. It would have to raise this rate above 2.5% before policy was considered tight.

Many economists say that the high inflation rate seen this year means the Fed has to move more quickly, to at least a neutral policy stance.

A new survey from the National Association for Business Economics found that, for the first time since the pandemic began, a majority of business economists believe the Fed is providing too much stimulus, a marked shift from last spring that reflects growing worries about high U.S. inflation.

Powell will speak at 10 a.m. Eastern on Friday. There will be a slew of Fed officials speaking on television ahead of the chairman’s remarks.

Tim Duy, chief U.S. economist at SGH Macro Advisors, sees two broad camps at the Fed: most officials who want to start to taper this year, and a smaller group of “several” officials who want to delay into 2022.

Duy said he thinks that Powell and his inner circle are in the “most” camp.

“Powell can firm up the view that tapering will occur in 2021 simply by reiterating the main themes of the most recent minutes and position the [Fed] board as more hawkish than the position elaborated by the most dovish members,” Duy said. 

At this juncture, economists said Fed policy will depend on the economic data.

“It is really no longer about the conceptual issues, it’s about the actual economic issues,” Posen said.

The Labor Department will release the August job report on Sept. 3. The economy has added an average of 831,000 jobs over the past three months. Another strong report could push forward the taper announcement into September.

“If it’s a very strong report then it moves things up,” Reinhart said.

But a few economists, like Jan Hatzius of Goldman Sachs, think that the tapering announcement may be delayed past November.

Read: What bond market experts are expecting from Powell’s speech

Stocks moved higher on Monday, with the S&P 500 index
SPX,
+0.85%

closing up 0.9%. The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.252%

slipped to 1.255%, well below the 1.75% level last seen in March.

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