Jay Powell’s Jackson Hole speech to be watched for taper timing clues


Federal Reserve updates

Jay Powell’s remarks on Friday at the annual Jackson Hole gathering of central bankers will be heavily scrutinised by investors for clues on when the Federal Reserve may start dialling back its pandemic-era stimulus programme. 

The Fed chair, who is due to speak at 10am US eastern daylight time, will be weighing in at a highly uncertain moment for the world’s largest economy.

Policymakers and economists alike are scrambling to assess whether potential damage from a startling surge in Covid-19 cases — which abruptly disrupted the Kansas City Fed’s plans to host this year’s symposium in person against the backdrop of the Rocky Mountains — will be severe enough to derail the Fed’s plans to eventually begin scaling back its interventions in financial markets. 

The focus will be on the central bank’s $120bn monthly asset purchase programme, which was put in place at the outset of the coronavirus crisis last year. Bond buying is set to continue at that pace until the Fed sees “substantial further progress” on its goals of average 2 per cent inflation and maximum employment. 

Conflicting economic signals have made it difficult for central bankers to reach a consensus on when exactly the “tapering” process should begin, and at what point these bond purchases should cease altogether.

A growing cohort of central bank officials have pointed to surging US consumer prices, propelled higher by shortages and broader supply chain constraints, to build the case that the Fed should end these bond purchases soon or risk fuelling even higher inflation and financial stability issues.

Many of these more “hawkish” members of the policymaking Federal Open Market Committee support an announcement on tapering at their September meeting, and argue for an end to the programme by the second half of next year at the latest. 

That would give the Fed the flexibility it needs to raise US interest rates in 2022 if inflation proves more persistent than initially anticipated. The Fed’s latest projections, published in June, indicate at least two rate increases are expected in 2023.

But with almost 6m more Americans out of work than before the pandemic struck, and Covid concerns rising again due to the spread of the contagious Delta variant, another faction of officials have argued that a more patient approach may still be appropriate.

Most market participants believe an announcement is likely in November, with tapering beginning either in December or January.

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