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Powell Says "Could Be Appropriate To Begin Tapering This Year" In Surprisingly Dovish Speech

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by Tyler Durden
Friday, Aug 27, 2021 - 09:34 AM

Update: Live Feed:

Here is the Fed itself pitching the speech:

The biggest takeaway from the Powell speech is what we already knew from the FOMC minutes, namely that "at the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year." Powell also notes that "the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test."

Indeed, as Bloomberg notes, based on the early headlines, a key message to reinforce something that appeared in the minutes of the July policy meeting: that there is no mechanical connection between tapering asset purchases and starting with rate hikes. In other words, the familiar, trite slogan from 2013: "tapering is not tightening"

But what was most important for markets is that Powell’s remarks failed to give a specific timeline, which is being viewed as especially dovish. As such, and as many expected, today's J-Hole meeting was a non-event, and instead traders will soon be turning their attention to the upcoming non-farm payrolls reading next week.

Some more highlights from his speech via Bloomberg:

  • Progress on Jobs Since July FOMC But Delta Has Spread
  • Cannot Take for Granted Transitory Inflation Will Fade
  • Sees Continued Jobs Progress, Inflation Back to Goal
  • Current Inflation A Concern But Likely to Be Temporary
  • Much Ground to Cover to Reach Maximum Employment
  • Ill-Timed Policy Move Could Be Particularly Harmful
  • Delta Poses Near-Term Risk But Job Prospects Are Good
  • Long-Term Inflation Expectations Consistent With 2% Goal

Some more highlights, on policy...

  • Incoming data should provide more evidence that some of the supply–demand imbalances are improving, and more evidence of a continued moderation in inflation, particularly in goods and services prices that have been most affected by the pandemic.
  • Focus on incoming data and the evolving risks offer useful guidance for today's unique monetary policy challenges.
  • "At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year."
  • The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant

Outlook

  • The baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time.
  • Despite today's challenges, the economy is on a path to just such a labor market, with high levels of employment and participation, broadly shared wage gains, and inflation running close to our price stability goal.

Delta

  • Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.

Inflation

  • Responding to temporary fluctuations in inflation may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times
  • If sustained higher inflation were to become a serious concern, Fed would certainly respond and use tools to assure inflation runs consistent with goal

Employment

  • Have much ground to cover to reach maximum employment

Yet despite Powell reiterating his FOMC Minutes comments, the speech comes of as especially dovish, with Powell saying it would be wrong to respond to temporary fluctuations in inflation. “Indeed, responding may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times.” As Bloomberg notes, the more you read the full text of the speech, the more dovish it comes off.

Powell also did not talk much about what effect he thinks delta will have on the economy, and sounds like he wants to wait and see more data. “We will be carefully assessing incoming data and the evolving risks.”

His full speech below (pdf link)

Preview:

Well, the most anticipated central bank event of the summer is finally here and at 10am, J-Pow will speak at the virtual J-Hole symposium (link to the Kansas City Fed schedule is here). The Fed chair will speak on the economic outlook, and the live feed can be found at the following link.

While earlier in the summer, Fed watchers were convinced Powell would use the virtual podium to unveil the specifics of tapering, consensus has now shifted with the majority now anticipating a "damp squib" from the Fed chair. As Rabobank wrote in its preview, "this could have been the event where the Fed Chairman gave us “advance notice” of tapering. However, it is more likely that we will have to wait for the September meeting of the FOMC for this early warning signal." Instead, Rabo's Philip Marey now says that "Powell may give us another verbal stepping stone toward “advance notice” by a modest change in language, similar to July’s addition that the economy has made progress since December. Powell may also use this speech to stress that there is no mechanical link between the timing of tapering and the start of the hiking cycle. Although many FOMC participants prefer to end tapering before the start of the hiking cycle, they want to make clear that the first rate hike does not automatically come directly after the end of tapering."

Morgan Stanley echoed as much, writing that with details around the taper now in hand, "there’s no need for Powell to use JH as a signaling opportunity. The Fed has delivered on its desire to provide clear communication", and "markets are well-prepped." So "all that’s left is for the data to give the green light."

In short, nothing we didn't already know from the latest FOMC Minutes, and the market is reacting appropriately with both stocks, rates and FX markets expecting modest, contained moves following Powell's speech.

In any case, for those who want to be prepared just in case there are surprises, below is a detailed preview courtesy of Newsquawk. The bottom line is that with few surprises expected, a key focus will be on the process itself

  • Speed (many think ~$15bln/mth),
  • Duration (many think it will take a year or so)
  • Composition (many think that MBS & Treasury purchases rolled-back proportionately

This year's Economic Symposium at Jackson Hole will be on the theme of "Macroeconomic Policy in an Uneven Economy." The highlight will be remarks from Fed Chair Powell, scheduled for Friday at 10:00EDT. The market will be looking for any clues about when and how the Fed will begin scaling-back its asset purchases. The Fed has been buying USD 80bln Treasuries and USD 40bln mortgage-backed securities per month, and has said that it will provide the market with advance notice about its intentions to taper these purchases, when ‘substantial further progress’ towards its inflation and labour market goals has been satisfied.

Some however suggest that Powell may disappoint those who are expecting details on the process, since the Fed Chair may not want to front-run the FOMC’s September 22nd meeting, and also since there are still differing views on the FOMC; some Fed officials, for instance, have said that they want to see the further employment reports before crystalising their view on tapering (note: the August jobs data is out on September 3rd, after Jackson Hole). We will be watching to see the extent to which Powell expresses concern on the Delta variant, which may signal a desire to move cautiously on a taper announcement.

  • 'SUBSTANTIAL FURTHER PROGRESS': The FOMC's July meeting minutes noted that the standard of "substantial further progress" had not yet been met, particularly with respect to labor market conditions, and that risks to the economic outlook remained, although most judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal, and close to being satisfied with respect to the maximum-employment goal. But there were still several participants that indicated that a taper was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee's "substantial further progress" standard, or because of uncertainty about the degree of progress toward the price-stability goal.
  • POWELL MIGHT NOT REVEAL MUCH: Some argue that Powell’s remarks may be a damp squib for those expecting a rich amount of detail; analysts at Moody’s, for instance, say that the Fed chair will not want to front-run the FOMC’s September 22nd meeting, while some senior Fed officials have said they also want to see the August jobs report (out on September 3rd – after Jackson Hole) before firming their views. The influential Governor Brainard speaking a few weeks ago said that the determination of when to begin to slow asset purchases will depend on the accumulation of evidence on 'substantial further progress', and she would be looking for this evidence within the September jobs report.
  • DELTA CAVEATS: One area Powell could reveal his thoughts on the tapering debate is in his views regarding the Delta variant. Recently, Fed's Kaplan -- who has been more aggressive in his tapering views relative to other FOMC colleagues -- was judged to have dialled-back his enthusiasm on account of Delta fears; Kaplan said that if he saw the variant persisting, or hitting demand, the Fed would have to adjust its policy views accordingly. At the post-meeting press conference in July, Powell did not seem overly troubled by Delta, stating that continued progress on vaccinations would help support the return to more normal economic conditions. Powell also said that there had been fewer implications from each COVID wave, and spoke about how we are in a stage of learning to live with the virus, although he did add that the Fed had optionality if needed. SGH Macro's Fedwatcher Tim Duy has suggested watching to see if Powell follows Kaplan’s lead and offers additional caveats about the current surge in infections; the key is how closely Powell follows the positioning of the minutes and Fed Vice Chair Clarida for evidence that the consensus on the Board is falling in line with a taper this year if the pandemic situation allows.
  • POTENTIAL TAPER TIMELINE AND COMPOSITION: There seems to be a consensus developing that the tapering process will be announced in September or November, beginning either at the end of this year or start of 2022. With this landing zone largely accepted, a key focus will be on the tapering process itself: at what rate will the Fed taper (many desks think around USD 15bln/month), over what time period (many think it will take a year or so), and what the composition of the taper will be (many think that MBS and Treasury purchases will be rolled-back proportionately; if we assume USD 15bln/month, that might imply tapering of USD 10bln of Treasuries and USD 5bln of MBS per meeting, if the tapering is indeed in proportion to the current rates of buying). Many of these questions will not be fully answered at Jackson Hole, and analysts suggest it is more likely that they will be revealed after the Fed has announced its intention to taper. Goldman Sachs' analysts, who are in line with this developing consensus, think that it is the FOMC's intention to formally announce the start of tapering at the November FOMC meeting, assigning a 45% probability, though have also assigned a 35% chance of a December announcement, with a 20% chance that it could be delayed until 2022. "We put high odds on a delay beyond November because of the downside risk posed by the Delta variant," Goldman writes, "we expect Powell to acknowledge both the strong employment gains in recent months and the downside risks posed by the Delta variant, and this would keep expectations on track for a potential September warning and November taper announcement, but would carefully avoid locking the FOMC into that timeline."

Finally, courtesy of Livesquawk, here is a FOMC cheat sheet of recent Fed commentary.

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