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Jackson Hole: forget tapering, rate hike signals will be the shock

Ahead of the Fed’s annual Jackson Hole symposium, three investment professionals discuss the outlook for monetary policy and the implications for markets.

Taper tantrum still a fresh memory

Sébastien Galy, senior macro strategist at Nordea Asset Management

The Jackson Hole meeting could be the trigger for the Fed to consider tapering its bond purchases, though it is unlikely. The Delta variant is spreading and the overshoot in inflation has dampened consumer sentiment – a process that could last another month or so.

The reason the market is so concerned about Fed tapering is because it could start to reverse some of the gains of quantitative easing, at a time when many assets are expensive and leverage elevated. The example of the taper tantrum in 2013 is still fresh in our memory, but the reality now is more complex.

The announcement of tapering is unlikely to create a large shock in the market, though the US treasury curve should eventually steepen again. The market has had a long time to prepare for tapering. The real shock will come when the debate on Fed rate hikes starts. This crucially depends on whether inflation is transitory, and early evidence suggests it is – though wages and rents are likely to provide persistent pressure. We favour North American equities, which are helped by buybacks, as well as diversification in investment styles and flexible solutions.

Do not expect Powell surprises

Alan Levenson, chief US economist at T. Rowe Price

Do not expect any big surprises from Powell’s speech relative to the message conveyed in his 28 July press conference, and the minutes of that day’s FOMC meeting. Policymakers indicated tapering is likely to commence later this year or early in 2022 – conditional on the economy continuing to evolve as they expect. The FOMC has committed to providing ‘advance notice’ before making any changes to the Fed’s asset purchases.

In my view, ‘advance notice’ will come at the conclusion of the 22 September FOMC meeting, followed by the formal announcement on 3 November that the pace of asset purchases will be reduced in December – assuming the labour market recovery continues to meet the Fed’s expectations. In this context, Chair Powell’s message will open the door to ‘advance notice’ on 22 September, without committing to any course of action.

More broadly, this speech could be an opportunity to emphasise that commencing the taper of asset purchases does not start the clock on a date-dependent countdown to interest rate lift-off. The latter has its own criteria. If Powell wants to nurture the expectation that there will be an interval of, say, several months between the cessation of asset purchases and the first rate hike, he will not dwell on upside risks to the inflation outlook – though policy makers have acknowledged the balance of risks leans to the upside.

Remember – tapering is not tightening

Gero Jung, chief economist at Mirabaud Asset Management

We expect some hints on the QE tapering issue, with some dovish cushioning as a main policy message. Overall, we are reminded that lowering asset purchases or tapering is not quantitative tightening. The Fed’s balance sheet will indeed continue to grow throughout this year.

Regarding the issue of tapering, we will likely see diminishing asset purchases later this year, given the broad consensus among FOMC participants – hence the importance of the timing of an official Fed announcement. We do not expect an official announcement later this week, with Powell more likely to acknowledge the strength of the most recent employment reports, while cautioning against the impact of the Delta variant on economic activity.

Besides the timing issue on tapering – with more details likely to be revealed at the 22 September meeting – what will be crucial is the potential to shift expectations for Fed action in the medium term. Market pricing continues to anticipate two 25bp rate hikes through the end of 2023, with a first rate hike near February 2023 – the former being broadly in line with the Fed’s own views. Any signals on possible changes in Fed policy might have an even more important market impact than the specific timing of tapering.

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