Federal Reserve Chair Jerome Powell’s highly anticipated speech to the Jackson Hole economic conference on Friday will likely offer few new hints about when the U.S. central bank may start reducing its massive asset purchases, analysts said.
But Powell could tackle the sensitive task of explaining why tapering the $120 billion in monthly purchases of Treasuries and mortgage-backed securities doesn’t mean an imminent interest rate hike, advancing an effort by Fed policymakers to keep traders from pushing up borrowing costs more than the central bank may feel is warranted or healthy for an economy with millions still unemployed.
“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.”
Fed officials agree.
The minutes of their July 27-28 policy meeting show that many thought it would be important to emphasize there is no “mechanical link” between a bond-buying taper and rate hikes.
Rejecting that link won’t be simple. Many Fed officials also felt it would be better to end the bond-buying program before raising rates. And they continue to debate whether to dial down the purchases quickly or stretch them out, for perhaps as many as eight months.
Additionally, some policymakers argue the bond purchases aren’t helping much anyway, since they are aimed at bolstering demand but can’t address the bottlenecks businesses face as they struggle to meet that demand as the economy rapidly reopens.
With so much unsettled, the odds were always long that Powell would use his remarks to the Kansas City Fed’s central banking conference, which normally takes place in Jackson Hole, Wyoming, but is being held virtually for the second straight year, to satisfy investors’ craving for taper timeline details.
That’s especially so now, as the surging Delta variant of the coronavirus shows signs of slowing the U.S. economic recovery, particularly in regions of the country hardest hit by infections. The data raises new questions about what appeared to be an emerging internal consensus at the Fed’s meeting last month for beginning to withdraw its extraordinary support for the economy later this year.
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.
“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.
Powell, who is due to speak via webcast at 10 a.m. EDT (1400 GMT)on Friday, may acknowledge the economy’s progress toward full employment, Markowska and other economists said. Although Powell will want to keep the door open to starting the taper in November, he will be “very cautious” about locking in such a timeline, Goldman Sachs economists said in a note this week.
COMPLICATED MESSAGING
Economists polled by Reuters expect the U.S. economy to add another 725,000 jobs this month, on top of the nearly 1.9 million gained in June and July. And inflation – a fresh read of which be released shortly before Powell’s speech – has been running above the Fed’s 2% goal for months, though most U.S. central bank policymakers expect it to moderate later this year.
The data suggests to many Fed policymakers that the economy is near to making “substantial further progress” toward full employment and 2% inflation, the bar they have set before they agree to pare the monthly asset purchases.
But to preserve low long-run interest rates for an economy that is still recovering from the downdraft triggered by the pandemic, Powell will also want to underscore that the hurdle for tapering is far shy of meeting the three-part trigger for rate hikes. The bar for raising borrowing costs includes actually attaining full employment and seeing inflation on track to be moderately above 2% for some time.
“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.”
And yet it is that kind of jump-the-gun reaction that Powell will want to head off. In 2013, when then-Fed Chair Ben Bernanke tried to smoothly foreshadow a coming reduction in bond purchases, traders responded by driving up long-term rates so sharply that the Fed ultimately had to delay dialing down its purchases.
Markets typically judge Fed communications most harshly at such policy turns. If they do so again, it could prove awkward timing for Powell, as U.S. President Joe Biden weighs whether to nominate him for another four years as Fed chief.
Deteriorating grades from Wall Street notwithstanding, it’s clear the Powell-led Fed is on a path to taper, even if his speech this week is expected to offer little news on exactly when.
Even the dovish San Francisco Fed President Mary Daly said last week that she’s confident the economy will meet the bar the central bank has set for beginning to reduce its support by the end of this year.
“The key message there is that it’s time really to think about dialing back that level of support we are giving to the economy because the economy is really standing on its own two feet,” Daly said in a virtual interview with Barron’s Roundtable, adding, however, that she would be “open-minded” about the Delta variant’s impact and could see a delay into next year.