News & Resources

Market Analysis

Latest Insights
Press Releases
Latest Insights

Market Wire
Powell Clears Way for Taper, While Lowering Rate Hike Expectations

by Karl Schamotta | August 27, 2021

In a long-awaited virtual speech at the Jackson Hole Economic Symposium, Federal Reserve Chair Jerome Powell briefly suggested that a tapering announcement might come this year, before forcefully arguing that inflation was poised to fade – lowering the need for tighter policy in the years to come. 

Powell acknowledged making headway against the Fed’s twin mandates: He said, “My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment”, and noted “most participants” at the last Federal Open Market Committee meeting felt it would be appropriate to begin reducing asset purchases this year.

But he stopped short of providing explicit guidance on when a decision might come: “The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks,” before pulling the trigger on a reduction in asset purchases.

And raised the bar for future interest rate hikes: “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” – a test that looks far from completion: “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis”.

On inflation, he sounded downright dovish: The Fed chair observed that price pressures have been confined to a narrow set of pandemic-disrupted products, pointed to a 25-year downtrend in durables inflation, highlighted weak growth in overall wages, noted that long-term inflation expectations remain suppressed, and argued that demographics, globalization, and technological change would likely “continue to weigh on inflation as the pandemic passes into history”.

Markets welcomed this view: Treasury yields dropped two basis points and equities leapt higher as the overall tone of the speech convinced investors that liquidity would remain abundant over the long term.

The dollar tumbled: The greenback fell to a two-week low in the moments after the speech was posted to the Federal Reserve’s website, while commodity-linked currencies jumped sharply higher.

Next week’s non-farm payrolls report has now assumed greater importance: Markets will now assume that every Fed meeting is a live one – that a tapering decision could come at any time – and will accordingly focus even more intently on incoming labour market data.

“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.

Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.

Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.

This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.

Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.

Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.

FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.

This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.

Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.

The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.

© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.