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.
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