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.
Print, print, and print some more.
I can’t imagine that will work forever but it looks like it’s working well enough for now.
If it wasn’t working, if the public had lost faith in the currency, if inflation expectations had become too high or too embedded, the Fed would not be able to do what they are doing.
But apparently, we have not reached those thresholds yet.
I have my serious doubts that the Fed can create wealth or prosperity. I’m also inclined to believe that the actions of the Fed tend to increase wealth inequality, rather than decrease it. Said another way, the size of the pie is not increasing, nor is your portion of it.
But anyway, at least for now, the Fed will continue to sprinkle its pixie dust as it has been.
Essentially, the Fed is just feeding the system and the system is built to grow inequality. Policy is where you could address the system. That said I would not entirely write off the Fed getting “a little” creative and say… opening a USD coin crypto/checking/savings account in every citizens name allowing them to claim $2000 a month in newly minted currency. I’m not saying it’s imminent but I think some people have been chewing on the idea.
Had there been just the slightest whiff of more hawkishness than the July minutes I suspect the markets would have sold off dramatically… to me that speaks volumes about the current precarious market values … just my two cents worth…
Bit since the July minites we’ve seen econ growth weaken, inflation slow, and Delta accelerate, so why would one expect the tone to be more hawkish at Jackson than in the July minutes?
There has been so much hawkish chatter that I think the odds setup was for something underwhelming thus relief to markets.
So many typos – I can spell, honest, just not on an iPhone apparently.