With less than 24 hours to go until the most closely watched central bank event of the summer, hot (pre)takes are rolling in hot and heavy, with some expecting a non-event (an increasingly consensus view) while others see Powell hinting at a taper but very, very gently.
One among them is Standard Chartered's global head of G10 FX, Steven Englander who today writes that "Fed Chair Powell is likely to cautiously affirm recent indications by Fed officials that a tapering announcement is likely at the November FOMC meeting." Englander emphasizes ‘cautious’ because Powell will likely stress that tapering is contingent on economic outcomes meeting expectations; if there is deviation from this baseline, a December announcement seems more likely than September.
The FX strategist also notes that one delay risk which we haven't seen discussed much, is that the politics of raising the debt ceiling could well peak around the November FOMC meeting, which could also temporarily detail the tapering announcement.
Furthermore, as Kaplan noted today, Powell is likely to draw a distinction between tapering and raising policy rates, which would require more concrete long-term inflation concerns. Optimism that inflation will fall towards desired levels may be one way of easing policy rate worries. Powell may also reprise the 2014 argument that "tapering isn’t tightening", which of course it is especially when layering on top the coming $500-$800 billion quantitative tightening from the Treasury which will rush to rebuild cash balances as soon as the debt ceiling logjam is resolved.
But while Englander believes Powell will at least admit there is a $120BN/month elephant in the room, if not address it, others are even more dovish, and expect the Fed Chair's speech to offer few new hints about when the tapering will start.
"He will do his best to say these are independent decisions ... and one does not necessarily speed up the other," said Steve Kelly, a professor at the Yale School of Management. "That's the biggest challenge ... this communication around tapering and rate increases."
Indeed, last Friday, even Dallas Fed Kaplan, among the biggest supporters at the central bank of an early taper, said last week he is starting to see signs of Delta's impact and will keep an open mind in the run-up to the Fed's policy meeting next month (although earlier today he did spark a mini selloff when he appeared to revert to this old, hawkish self).
"It's hard to imagine the Fed committing to a specific tapering timeline in light of the ongoing public health crisis," Aneta Markowska, a Jefferies economist, said of Powell's upcoming speech.
"It's complicated messaging right now," said Tim Duy, chief U.S. economist at SGH Macro Advisors. "The reality is the tapering is not separate from the rate hike: once you start the tapering, you kind of start a clock on the rate hike."
One especially hawkish view comes from Bloomberg's market live blog, according to which Powell can not afford to blow tomorrow's messaging: "either Jay Powell gives a very clear nod that he intends to taper this year, or he doesn’t. Because if there’s one thing the Fed hates in these days of forward guidance, it’s surprising the market. And to have any chance of a taper by December, the flares would really have to go up now. If they don’t, and then we DO get a taper this year, things could get a little hectic."
Even if Bloomberg is wrong and Powell does wing it tomorrow, Goldman earlier this week explained that regardless of what he says tomorrow, the FOMC is most likely to formally announce the start of tapering at the November FOMC meeting 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.
One potential reason why Powell may rip the band aid off anyway and rush to hint at tapering is because as Mohamed el-Erian said, "calls for a tapering of massive asset purchases are not to slow the economy but, instead, to make room for pro-growth fiscal measures and also avoid a slamming of the monetary policy brakes down the road." In other words, the Fed will taper now so it can ease again in a few months when the wheels completely fall off the economy.
And then there is the pure financial conditions angle: according to some, the Fed is aware that it has blown a massive asset bubble, something Kaplan hinted at earlier today when he said that he is concerned by the "unintended impact" of Fed bond buying, where the most obvious impact is bubbles everywhere.
*KAPLAN: CONCERNED BY UNINTENDED IMPACT OF FED BOND BUYING— zerohedge (@zerohedge) August 26, 2021
Is he suggesting that stonks are artificially propped up? Unpossible
Then again if the Fed is only now starting to worry about the bubbles its catastrophic policy has blown then... good luck.
Finally, a question is how will markets react: here Englander chimes in that asset prices could move on Powell’s speech even if it is close to expectations. Many investors will avoid taking positions ahead of potentially market-moving events for fear of abrupt movements against them. If the desired positions are concentrated in one direction or the other, markets may move after the event even if there is no surprise. This is a point that Nomura's Charlie McElligott underscored earlier this week when he said that there is enormous amount of TY optionality rolling-off at this Friday’s expiration, with 63% of TY option OI expiring and indicating potential for a "Gamma unclench."
So if Asia COVID concerns continue to recede and Powell does not shock on the hawkish side, a risk-positive market move could occur absent any surprise.