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Goldman: Here's What Powell Will Say At Jackson Hole

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by Tyler Durden
Monday, Aug 23, 2021 - 02:01 PM

There has been a palpable shift in market expectations heading into Friday's Jackson Hole (virtual) symposium whose theme is “Macroeconomic Policy in an Uneven Economy" and where the key event will be Powell's speech on the economic outlook at 10am EST: where as recently as a few weeks ago, consensus was that Powell would announce the start of tapering at either the November or December FOMC meeting, the sudden hit to the economy which has seen a plunge in consumer sentiment, a 3rd consecutive miss in retail sales and banks slashing GDP estimates across the board, has upended said consensus and now many believe that Powell may wing it, and avoid any discussion of an imminent taper launch.

This sentiment was boosted by Dallas Fed President Robert Kaplan, a well-known hawk, who said on Friday that he might reconsider the need for an early start to tapering if the virus harms the economy.  This has added additional uncertainty to Fed Chair Jerome Powell's speech at Jackson Hole this week, which was moved online because of pandemic restrictions.

"Our base case is that the FOMC will announce a taper in September if the August non‑farm payrolls is strong," said Joseph Capurso, head of international economics at CBA. "We anticipate the taper will be implemented in October or November, though the recent increase in Covid infections and deaths in parts of the U.S. may give Powell pause."

Of course, nobody could fault Powell for "changing his mind of the facts change", but is the market's abrupt sentiment shift merited? According to Goldman the answer is yes, because the last thing the Fed wants is to corner itself at a time when Delta cases are still rising. As a result, Goldman writes that "acknowledging that the labor market has made progress since the FOMC last met in July would help to keep expectations on track for a potential September warning and November taper announcement, but we think Powell will be very cautious to avoid locking the FOMC in to that taper timeline. The July FOMC statement took a surprisingly sanguine view of the economic risks posed by the virus situation, and we expect Powell’s tone to be very different this week."

But while Powell may avoid making a firm commitment at Friday's virtual conference, the Fed will still have to do something in the coming months, and here Goldman thinks that the FOMC’s intention is to formally announce the start of tapering at the November FOMC meeting if all goes well by then, and to taper at a pace of$15bn per meeting. The bank sees a 45% chance that the formal announcement will come in November, a 35% chance that it will come in December, and 20%chance that it will be delayed until 2022. Goldman puts high odds on a delay beyond November because of the downside risk posed by the Delta variant.

With that in mind, here is Goldman's full preview and Q&A of the Jackson Hole Symposium which takes place this Friday.

  • The theme of the conference is “Macroeconomic Policy in an Uneven Economy.”Chair Powell will give a speech on the economic outlook at 10am EST on Friday that will be broadcast online.

  • We think the FOMC’s intention is to formally announce the start of tapering at the November FOMC meeting if all goes well by then, and to taper at a pace of$15bn per meeting. We see a 45% chance that the formal announcement will come in November, a 35% chance that it will come in December, and 20%chance that it will be delayed until 2022. We put high odds on a delay beyond November because of the downside risk posed by the Delta variant.

  • We expect Chair Powell to acknowledge both the strong employment gains in recent months and the downside risks posed by the Delta variant. This would keep expectations on track for a potential September warning and November taper announcement, but would carefully avoid locking the FOMC in to that timeline.

Q: What is the schedule for the Jackson Hole conference?

A: The full agenda for the Fed’s Jackson Hole Economic Policy Symposium will be released at 8pm EST on Thursday, August 26. The conference will begin the next morning and Chair Powell will speak on “The Economic Outlook” at 10am EST on Friday, August 27. His speech and the other events will be broadcast to the public on the Kansas City Fed’s YouTube channel. Conference papers and other materials will be posted at the start of each presentation. The entire conference will take place virtually again this year because of the recent Covid resurgence caused by the Delta variant.

Q: What are your current expectations for the Fed’s tapering process?

A: Based on our reading of the minutes to the July meeting and recent commentary from Fed officials, we think the FOMC’s intention is to formally announce the start of tapering at the November FOMC meeting if all goes well by then, and to taper at a pace of $15bn per meeting, split between $10bn in UST and $5bn in MBS. We interpret the FOMC’s intention to provide “advance notice” before the official taper announcement to mean that it will include an explicit warning in a future FOMC statement that it intends to formally announce the start of tapering at the next meeting, so that a November formal announcement would be preceded by a warning in the September statement.
We see a 45% chance that the formal announcement will come in November, a 35% chance that it will come in December, and 20% chance that it will be delayed until 2022.

We see a strong chance that the formal announcement will come after November because of the downside risk posed by the Delta variant. US Covid cases have risen more than tenfold in the last two months, and we recently cut our Q3 growth forecast from 9% to 5.5% to reflect the hit from the Delta variant to both consumer demand and factory production. We expect that total consumer spending will decline in August and that at least some of the economic data flow leading up to the September FOMC meeting will be mediocre. Our best guess is that Covid cases will start to decline in the first half of September, and the FOMC might be willing to look through poor data if the virus situation is headed in the right direction by its September 22 meeting. But there is a good chance that the September meeting will seem like an awkward time to announce a reduction in monetary policy accommodation.

Q: What do you expect Powell to say about tapering?

A: We expect Chair Powell to acknowledge both the strong employment gains in June and July and the downside risks posed by the Delta variant. Acknowledging that the labor market has made progress since the FOMC last met in July would help to keep expectations on track for a potential September warning and November taper announcement, but we think Powell will be very cautious to avoid locking the FOMC in to that taper timeline. The July FOMC statement took a surprisingly sanguine view of the economic risks posed by the virus situation, and we expect Powell’s tone to be very different this week.

Q: What is the rest of the conference about?

A: The theme of the conference is “Macroeconomic Policy in an Uneven Economy.” No additional details are available yet, but we assume that conference papers will address the policy implications of the unevenness of the recovery of both the economy and the labor market.

Throughout the year, our US Economic Recovery Tracker has shown the very different rates of progress across sectors of the economy. While both goods production and homebuilding have more than fully recovered and are constrained only by supply-side problems rather than insufficient demand, some high-contact or office-adjacent parts of the service sector remain depressed, and the virus resurgence has further delayed their full recovery. Progress in the labor market has likewise varied across industries and demographic groups so far, and policymakers might discuss what this means for monetary policy in light of the Fed’s new broad-based and inclusive interpretation of its maximum employment goal.

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