Powell Says Nothing In Anticlimactic Jackson Hole Speech

It could be appropriate for the Fed to begin tapering monthly asset purchases this year, Jerome Powell said, during his hotly-anticipated Jackson Hole address, delivered virtually this year due to the pandemic.

Tapering, he emphasized, doesn’t necessarily carry a direct signal for the timing of the first rate hike.

Powell’s remarks echoed (in some cases almost verbatim) the July Fed minutes, both in reiterating that a taper unveil is likely “this year” and in seeking to delink liftoff from the taper timeline.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” he said.

The minutes, you’ll recall, noted that for “many participants” it was important that the Committee “clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.”

It would appear that Powell was keen to avoid making waves in his remarks, perhaps content to let the hawkish banter that preceded his address stand on its own as a testament both to healthy dissent and some officials’ concerns about the side effects of the current policy stance for inflation and financial stability.

Powell conceded that the “substantial further progress” threshold has been met for inflation. He cited the “sharp run-up” in prices but noted that “the dynamics for inflation are complex.”

A “relatively narrow group of goods and services directly affected by the pandemic” have played an outsized role in pushing up prices, and that effect is “expected to be transitory,” he said, citing trimmed mean measures which paint a much more benign picture (figure below).

“Time will tell whether we have reached 2% inflation on a sustainable basis,” he continued. “While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated.”

On the jobs front, Powell said “the outlook for the labor market has brightened considerably.” He noted employers’ difficulties in hiring enough workers to keep up with demand and cited “favorable conditions for job seekers.”

That said, he described the jobless rate as “much too high,” noting elevated long-term unemployment and concerns about the participation rate.

There’s still “much ground” to cover to reach maximum employment, he noted, referencing the nearly six million-job shortfall to pre-pandemic levels (familiar figure, below).

Since the Fed’s last meeting, there’s been more progress on jobs, Powell remarked, but the Delta variant is creating uncertainty. While the strain “represents a near-term risk, prospects are good for return to maximum employment.”

In short, he stuck assiduously to the script, as is his wont.

The market reaction told the story. The dollar dropped to a two-week low, gold gained, IG CDX tightened and stocks rose to session highs.

Powell’s speech, which lasted around 20 minutes, was anticlimactic. I imagine that was the intent.