The date has been in the diary/calendar for several weeks. The build-up has been hectic with much chatter and discussion about what will happen and the repercussions. Surely the event won’t let us down?
The Jackson Hole symposium has served as a forum to announce or at least lay the groundwork for many policy changes over the years. For instance, Fed Chair Powell’s speech last year unveiled a dramatic shift in the central bank’s approach to monetary policy. He said the Fed would tolerate more inflation and aim to limit shortfalls from full employment, rather than seeing excess employment as a problem to be solved.
This time around, Powell may not deliver such radical fireworks, but that does not make it less challenging.
The biggest question facing the Fed is whether the increase in inflation is transitory or not.
Another wave of coronavirus simply adds a new element to the discussions.
Free Reports:
Virtual conference again
The conference has been shortened and made into a virtual one for the second year running. Does this change not just the delivery of the speech but the contents too?
The market is looking for clarity over its tapering plans. And yet the virtual move highlights the uncertain environment the Fed has to operate in as it seeks to withdraw emergency policy support.
Perhaps that is the key point right there – “emergency” monetary policy measures are still in place. Yet, inflation is on the rise and there are few signs of it easing anytime soon. The latest Fed minutes showed the majority on the FOMC agree progress has been made towards the symmetric 2% goal. The very strong July labour report surely convinced a few of the Fed doubters too.
Dollar impact
The majors are more or less confined to recent ranges with broad measures of FX volatility still subdued. The risk rally stalled yesterday as traders readied themselves for today’s seminal speech. Expectation that Chair Powell will adopt a more cautious tone means the bar for a dovish surprise seems higher than compared to a more hawkish tilt.
If Powell simply endorses the prospects of Autumn tapering with the Delta-variant effects downplayed, then the dollar will find support. Any further discussions on the timing and length of tapering, as well as the hiking cycle to follow will be bullish.
In the medium term, consensus still sees the Fed normalising policy measures faster than most of its peers. But one possible scenario sees Chair Powell acknowledge imminent tapering, but a much more patient Fed when it comes to kicking off the hiking cycle. The market is pricing in only 50bp of interest rate rises over the next two years.
An intriguing afternoon awaits …
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