The closely-awaited Jackson Hole speech by Fed chair Powell reaffirmed that QE tapering would begin later this year. While being more upbeat about the progress of employment and inflation, Powell warned of the downside risks posed by the rapid spread of the delta variant. He also attempted to de-link taper and rate hike, causing instant decline in Treasury yields after his speech.
The speech clearly delivered an optimistic tone about economic developments. Powell acknowledged that the month since the July FOMC meeting “brought more progress in the form of a strong employment report for July” and that there has been “clear progress toward maximum employment”. The chairman also noted that inflation has already met the “substantial further progress” test, though reiterating the transitory nature of inflation. Meanwhile, he reiterated the stance at the July meeting that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year”. These comments signal that the hurdles to reduce monetary stimulus have largely been overcome.
Yet, Powell also warned that “the further spread of the Delta variant” would warrant policymakers to “carefully assessing incoming data and the evolving risks” in the upcoming meeting in September. He added that the members “expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects”. He noted that “for now, I believe that policy is well positioned; as always, we are prepared to adjust”. Besides demonstrating an open mind to adding or reducing stimulus, the chair also assured the market that “even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions”. This appears to water down the probability for a rate hike earlier than what was projected in June. Recall that the median dot plot in June projected at least two rate increases in 2023.
The speech does not altered our view that the Fed would make formal announcement about tapering in November. Yet, whether such announcement would be made earlier *(i.e.: in September) hinges on the August employment report (due next Friday) and the development of the pandemic. The market currently anticipates a +665K addition in non-far payrolls, following a strong +943K increase in July. The unemployment rate is expected to drop -0.2 ppt to 5.2%.