Psychosis among investors over Powell’s lack of scope for action in Jackson Hole

Jerome Powell Fed

“Macroeconomic Policy in an Uneven Economy”. The head of the Jackson Hole (Wyoming) Symposium that starts this Thursday covers under its virtual format the details of the beginning of the withdrawal of monetary stimuli. At a time when the recovery is showing signs of fatigue, the stalking Delta variant is pressing and the Federal Reserve already meets one of its objectives, see stability in prices, the risk of a potential error increases.

That is why the speech of the Chairman of the Federal Reserve, Jerome Powell, scheduled for Friday morning (at 4:00 pm in Spain), will capture the maximum attention of the market. In his calculated message, the guardian who watches over full employment and average inflation of 2% will avoid giving specific details about when and how the tapering will begin, as the process of reducing debt purchases that currently is known in financial jargon is known. they reach 120,000 million dollars a month.

“Powell will be very cautious to avoid cornering the Fed on a fixed schedule,” acknowledges David Mericle, an economist at Goldman Sachs. In this regard, he considers that the last meeting of the Federal Open Markets Committee (FOMC) in July adopted a surprisingly optimistic view of the economic risks posed by the current situation of the virus, hence the tone of the Fed president is very different this week.

Progress in employment

However, following the spike in payroll creation in June and July, you’ll acknowledge that the job market has made progress, something that will help keep expectations alive that the key nod that will instigate the official tapering announcement could come as soon as the FOMC entourage on September 21 and 22.

“The announcement of the reduction in purchases is expected to come in September, November or December, which means that Powell’s ability to influence market prices will not be limited,” says Andrew Hollenhorst, an economist at Citi.

From his point of view, when the tapering will end is a much more important question, since most Fed officials will want to complete this process before raising rates. “We do not expect any new information on the rhythm and composition of the tapering,” he says, referring to the meeting in the next few days.

The Fed president will be cautious and will not specify the ‘tapering’ calendar

At the moment there is some consensus among the different investment desks that the Fed will reduce its purchases at a rate of 15,000 million dollars per meeting, distributed between 10,000 million in Treasury bonds and 5,000 million in assets backed by mortgages with the objective of finalize the purchases of both at the same time.

The symposium is not a formal policy meeting. Instead, the meeting is organized as a conference, a more appropriate format to pose risks and monetary policy formulas in a relaxed manner.

Jackson Hole acquired greater political importance in the early part of the last decade since, at that time, the speeches of former Fed Chairman Ben Bernanke in 2010 and 2012 served to advance a more accommodative policy, which led to two more rounds. of debt purchase programs (quantitative easing or QE for its acronym in English).

Currently the Fed’s margin of error is increasing considerably. While the production of goods and the construction of houses have recovered and are limited only by supply problems and not by insufficient demand, some parts of the service sector that have a high degree of contact remain depressed as the The virus’s resurgence has further delayed its full recovery.

Anatomy of a potential market tantrum

The 2013 tantrum was sparked by Bernanke’s comments on May 21. Sales translated into a 5.8% drop for the S&P 500 that lasted through June 24. However, when the market observed that the pullback was a complete healing of the economy, the S&P 500 recovered all that it lost in just 17 days and then soared 15.1% in the following six months. The market stumbled twice in 2014, dropping 5.8% and 7.4% from January and September, respectively, but it wasn’t until May 2015 that the S&P 500 succumbed to a more significant decline of 14,6%.