The much-anticipated Jackson Hole meeting confirmed recent expectations of an unchanged monetary policy outlook. Just like recent speeches and the July Federal Reserve meeting press conference, Chairman Powell was comfortable having the tapering conversation while stopping short of pre-committing to the timing of its announcement, confirming our thoughts that there might be a few hurdles left to be overcome before an official announcement takes hold.
First, we think Powell would like to build a consensus among Fed members as there seem to be varied views on the timing of the event; second a cautious Fed would like to confirm that labor recovery is truly on the path to meeting the “substantial progress” threshold with another strong jobs report; and third, there is an intentional push by the chairman in trying to avoid a taper “tantrum” at all cost by giving investors as long a notice as realistically possible.
A few key takeaways stand out from last week’s speech:
- The Fed seems to be looking through the Delta variant’s impact on economic projections; this is important as there was uncertainty as to how the Fed would respond, considering the Reserve Bank of New Zealand’s change in monetary outlook due to a single case of Delta variant in that country.
- The focus has firmly shifted to labor recovery, while the inflation goal has been met.
- Despite the Fed’s view of higher inflation dynamics as transitory, the chairman is committed to remaining patient but watchful based on experience, stating that, “Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments. And it is sometimes difficult to do so with confidence in real time. At such times, there is no substitute for a careful focus on incoming data and evolving risks.”
- Monetary policy rates liftoff should be de-linked from the announcement/implementing of tapering of asset purchases.
We conclude that a decision to taper has been reached but that the Fed will be intentionally patient in its announcement while building consensus within its committee and messaging its decision to investors by attaching it to the guideposts of its evolving framework.
We think the September meeting will most likely be used to achieve this purpose with a high probability for a November meeting announcement and start date of January 2022.