Unpacking Powell’s remarks at Jackson Hole: Could the Fed announce a decision on tapering in November?
On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed remarks by U.S. Federal Reserve (the Fed) Chair Jerome Powell at the central bank's annual economic symposium.
Powell signals Fed may begin reducing asset purchases this year
In an eagerly anticipated speech at the Fed's Jackson Hole summit, conducted in a virtual format, Powell signalled that the central bank could begin reducing, or tapering, the pace of its monthly asset purchases by the end of the year, Eitelman said. "This is important, because the Fed only has three remaining policy meetings this year at which it could announce the start of tapering: one in mid-September, one in early November and one in mid-December," he explained.
Based on this, Eitelman believes that the central bank is most likely to announce its plans for tapering at the 2-3 November meeting. "Given that the Fed looks to begin tapering by the end of the year, a December announcement seems a bit too late in the year, as it typically takes the Federal Reserve Bank of New York some time to implement these decisions and decide how it will actually trade securities," he said. Eitelman added that an announcement at the central bank's 21-22 September meeting also appears a bit too soon, especially given the current spread of the delta variant of COVID-19 and its potential impacts on the economy.
"Ultimately, in my view, the guidance from Powell's speech narrows the timing of the tapering decision pretty squarely on the November Fed meeting," he concluded, noting that this aligns with prior forecasts from the strategist team at Russell Investments.
Equity markets rise on Powell's remarks
Eitelman characterised the market reaction to Powell's comments as calm, if not outright strong, noting that the MSCI All-Country World Index was up roughly 70 basis points in the wake of his remarks, as of mid-morning Pacific time on 27 August. "The benchmark S&P 500® Index also rose about 60 basis points in the hour following the Fed chair's remarks, which is a pretty good move," he added.
Bond markets also reacted fairly calmly, Eitelman said, with the yield on the 10-year U.S. Treasury note staying relatively flat. The muted reaction pales in contrast to the selloff in markets triggered by former Fed Chair Ben Bernanke's remarks on tapering during the summer of 2013, infamously known as the taper tantrum, Eitelman noted.
"There are three key reasons why I think markets have reacted in much less dramatic fashion this time around - with the first being that the Fed is moving toward this decision for good reasons," he said, explaining that the economic recovery has been robust and corporate earnings growth has been exceptionally strong. The second reason, Eitelman said, is that the Fed's plans have been exceptionally well telegraphed, with the central bank taking a series of baby steps toward a tapering decision over the past few months. "Because of this, the Fed's announcement on tapering is not going to come as a surprise - which is the opposite of what occurred back in 2013," he explained.
The third reason for the lack of volatility in markets following Powell's speech is that the Fed chair has gone to great pains to separate the central bank's tapering decision from a decision on raising interest rates, Eitelman said. "In his Jackson Hole remarks, Powell really emphasised that a decision on hiking rates is still some ways off, noting that there's still a lot of ground to cover as it pertains to full employment before a rate increase would be appropriate," he explained. This, in turn, likely helped soothe equity-market concerns about a rise in borrowing costs, Eitelman said.
August jobs report a key watchpoint for investors
With Powell's closely watched speech now in the rearview mirror, Eitelman said that market attention is likely to turn to economic data reports for the month of August. Several of these snapshots of U.S. and global economic performance will be released in the coming weeks, he said, with the U.S. nonfarm payrolls report for August likely to command extra scrutiny.
"The big question in this report will be whether the U.S. labour market is continuing to make robust gains, especially in light of the delta variant," he said, noting that the July employment figures were mostly calculated before the variant began its steady sweep across the country. Eitelman believes that the August jobs numbers will likely remain strong, as the U.S. economy appears to be powering through the latest surge in COVID-19 cases. "The big focus in the coming weeks will be whether the economic recovery is still continuing - and I think the answer is going to be yes," he concluded.