Powell Announces Fed Will Begin Tapering By End Of Year
The long-awaited Jackson Hole Summit has arrived. Chairman Powell gave his speech at 10 am EST on Friday and announced that the Central Bank was likely to begin tapering before the year ends while keeping his options open due to the Delta variant. The symposium was held virtually for the second consecutive year due to concerns about the pandemic.
Powell spent most of the speech making the case that inflation is transitory. According to the Fed Chief, the mighty forces of globalization and technological change are unlikely to subside when economies get roaring again. Powell didn’t give much credence to some of the hawkish arguments advanced by a growing chorus of Fed Bank Presidents but did say he stands right and ready to raise rates if inflation proves out of control. He said the Central Bank is carefully monitoring inflation expectations.
Perhaps Powell was a bit guarded as his would-be predecessor, Lawrence Summers penned an op-ed in the Washington Post that compared Powell’s “incremental thinking” to the failed counterinsurgency strategies in Afghanistan and Vietnam. Yikes. In any event, the meeting was largely dovish in the case of the inflation debate. While many had prepared for a hawkish surprise, the safe bet looks like November is probably the earliest tapering will begin. September’s meeting should provide more detail.
If you paid attention to the Fed minutes from July, you might have noticed that they discussed their concern that the public perception of connecting the timing of tapering to rate-rises might be problematic for them and raise the chances of an unpleasant misunderstanding. Powell dedicated some of his speech to addressing this. He said the criteria for raising rates would not only be wholly unrelated to tapering but would also use a “different and substantially more stringent test.”
The Fed’s preferred method of measuring inflation, the PCE (which excludes gasoline and food prices), came in at 3.6% for July compared with a year ago. Powell explained that despite currently hot numbers, he viewed the risk of raising too early in response to temporary and transitory inflation to be a much higher risk than continuing accommodative policy. He pointed out that tapering is slowing the pace of accommodation, not tightening, and as the Central Bank has repeatedly stressed, rate rises are quite a bit further off.
One of the messages of Powell's speech is essentially something that we already knew that further action would likely be dependent on the labor market. Powell seems to think the Fed has the necessary tools to interrupt inflation if it proves more than transitory despite growing concerns from regional bank Presidents. Even the Jackson Hole Symposium's title, Macroeconomic Policy In An Uneven Economy, indicates that the Fed is thinking of reducing inequality by achieving maximum employment.
The hawks also blinked recently, as we pointed out in these pages last week. Dallas Fed President Kaplan, the most boisterous voice of the hawks, said he wanted to examine the full impact of the Delta variant on growth before re-committing to the aggressive timeline he’d previously been advocating.
Remember also, the better-than-expected jobs report in July, along with indications that key drivers (like used cars) of recently elevated inflation may have peaked, leave the doves with a pretty strong hand, and may give some comfort to those who designed and advocated for the new Adjustable Inflation Target framework which has been so central to the current thinking of the FOMC leadership.
Three research papers were released at the symposium. The first was Monetary Policy in Times of Structural Allocation, the second was Maximum Employment and The Participation Cycle, and the third was Fiscal Policy in The Age of COVID-19.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.309%.
