What Powell will (not) say in Jackson Hole
What to expect from Jackson Hole? Few news on tapering, more details on the political framework. The comment by Paolo Zanghieri, senior economist of Generali Investments
Despite high expectations, President Jerome Powell's speech at the Jackson Hole symposium is likely to be lacking in detail about the reduction in Fed asset purchases, in light of the risk associated with rising Covid cases and persistent economic uncertainties.
If the Delta variant doesn't prove too dangerous, we expect a clear sign of imminent tapering in September, an announcement in November, followed by implementation in December.
Powell could take this opportunity to further clarify some key aspects of Fed policy, notably emphasizing the distinction between asset tapering and rate peaks.
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Expectations are very high for President Powell's speech on Friday night at the Jackson Hole annual conference. In any case, we believe that those who expect precise communication about the methods and timing of tapering on asset purchases may be disappointed, for two main reasons:
The latest data remains positive, but momentum is easing and inflation fears have not increased. Additionally, the Delta variant of Covid is spreading fast, increasing the risk of partial lockdowns in some of the larger states. The July employment data was very encouraging, but the participation rate, one of the benchmarks the Fed uses to determine the state of the labor market, remains subdued.
The FOMC (which is responsible for the final decision on tapering) did not have the opportunity to review the situation, to assess how it relates to the “rosy” vision of the economy outlined in the minutes of the July meeting. Furthermore, the minutes themselves clearly indicated that there is not yet a timeline for tapering.
The meeting on 22 September will be a more appropriate occasion to warn about impending tapering, as it will also include updated data on growth and forecasts on employment and inflation. Our baseline scenario, assuming the Delta variant remains under control, is for a formal announcement in November, followed by implementation in December.
While not a market mover, Friday's speech remains interesting as it will provide Powell with an opportunity to further clarify some aspects of Fed policy:
There could be a partial judgment on the economic situation, with tones that we expect similar to those of the July meeting, and an assessment of how the evolution of the labor market is related to the Fed's forecasts of full employment. The mantra of transient inflation should be reiterated.
In line with the July minutes, Powell will further refine the difference between removing stimulus through tapering and genuine tightening of financial conditions through a rate hike (which we don't expect until mid-2023). This should help minimize the impact of tapering on financial markets.
Eventually Jackson Hole is an academic conference and therefore President Powell could take the opportunity to clarify the Fed's view on the role of asset buying in supporting the economy, as the tool has now become mainstream.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-non-dira-powell-a-jackson-hole/ on Fri, 27 Aug 2021 05:22:19 +0000.