Anticipated commencement of reduction prior to Christmas.
US Federal Reserve's Monetary Policy Path Remains Unclear After Powell's Jackson Hole Speech
US Federal Reserve Chair Jerome Powell's speech at the annual symposium in Jackson Hole did not provide any significant new details about the central bank's monetary policy path.
Powell did confirm that "substantial further progress" on inflation has been achieved, but he did not announce any further "substantial progress" towards maximum employment. This suggests that the US labor market still has a way to go before the Fed considers tightening monetary policy.
The Fed's planned reduction of bond purchases throughout 2021 remains on track, with the start of tapering anticipated at the earliest by the end of this year. However, the question of how quickly the Fed will reduce its bond purchases remains unanswered.
Powell attempted to downplay the connection between tapering and rate hikes, but his comments suggest a potential for a more hawkish surprise on September 22, when the Fed meets next. A rapid reduction in bond purchases could be a sign of possible earlier rate hikes.
Oliver Blackbourn, Multi-Asset Portfolio Manager at Janus Henderson Investors, observed that Powell's speech was a mix of old and new topics, including transient inflation, unemployment still far from pre-pandemic levels, and tapering by Christmas.
Christian Scherrmann, US Economist at DWS, made predictions about the US Federal Reserve's monetary policy path. He suggested that the end of quantitative easing could be linked to when interest rates might rise.
Markets appear to be accepting a "dovish taper" for now, but close monitoring of the US labor market remains key to assessing the monetary policy path. The Fed meetings in the remaining part of 2021 may provide further clues about the tapering and the eventual timing of any rate hikes.
We expect further clues after the September meeting, as the Fed continues to navigate the complex economic recovery from the pandemic.
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