The Jackson Hole Symposium will take place this week from the 26th to the 28th of August. The meeting focuses on important issues affecting the global economy. Throughout the event’s history in Jackson Hole, attendees from 70 countries have gathered to share their diverse perspectives and experiences. Market participants will be awaiting insights about the Fed’s “taper talks” from the symposium. We have received the first opinions of the experts on the potential outcomes of this year’s symposium.
Charles Diebel, Head of Fixed Income at Mediolanum International Funds Ltd (MIFL)
The Jackson Hole symposium this week has been the centre of market attention for some time as a signalling event with regards the outlook for monetary policy. This is based on the fact that in prior years the symposium has been used as a ‘way marker’ for Fed thinking and the likely policy outcome. On this occasion the focus will be on the tapering of asset purchases and the current time line with the Fed currently buying $120 bln of UST and MBS each month.
No doubt the improving economic outlook has added to the belief in Fed officials that the time to taper is nearing albeit with a range of opinions from ‘right now’ to ‘some time in 2022’. Whilst the outcome will remain data dependent, the body of views on the FOMC suggest that tapering will be announced early in Q4 and enacted by year end provided the growth data continue to support this. First and foremost, here is job creation and after the last NFP report printed very strong, a couple more reports like that will see the FOMC start tapering before year end with the ‘taper’ likely to conclude by mid-year next year, opening the way for rate hikes early in 2023.
That said, the taper itself has been very well signalled and is unlikely to be a catalyst for a major market sell off, indeed, it historically has seen the long end of the curve perform well as the process improves the outlook for inflation medium term by heralding progressive tightening in monetary conditions. The only real caveat to this outlook is if the data do not deliver as this would in effect delay the process by not meeting the ‘sufficient improvement’ the FOMC have been looking for.
Silvia dall’Angelo, Senior Economist, Federated Hermes International
The Jackson Hole Symposium – held annually in late August – typically offers the Fed an opportunity to convey important messages on the monetary policy setting or framework. Last year, at Jackson Hole, Chair Powell pre-announced the outcome of the Fed’s one-year-long strategy review and the imminent adoption of the flexible average inflation targeting (FAIT) approach.
This year the market’s attention is laser focused on possible tapering indications; however, the Fed is unlikely to provide much new information on the matter at this stage.
Recent Fed communication including the Minutes of the July meeting suggests on balance that a tapering announcement will take place in November or December. This year, the Jackson Hole forum might be an occasion to explore a range of more far-reaching themes, such as a central bank’s digital currency (a project the Fed has been working on), financial stability issues, inequality and, possibly, ways to incorporate climate change within the central bank’s mandate.
Mondher Bettaieb-Loriot, Head of Corporate Bonds, Vontobel
The U.S. Federal Reserve’s annual summer symposium in Wyoming represents an important data point for financial markets since it provides valuable clues as to the policy moves the Fed may make in the ensuing twelve months. This year will be no exception and the investor community should listen carefully. It usually chooses not to resulting not only in quite some market volatility but also opportunities.
Average inflation is the focus
Take last year’s gathering for instance, when the Fed introduced their new inflation framework “Average Inflation over Time” (AIT). The Committee and Chair Powell have remained firmly committed to it since then. In fact, over the past twelve months, Powell has been re-iterating that they will not raise rates pre-emptively on the fear that the labor market could be over-heating or that inflation could possibly accelerate. One key component of their new AIT framework is their insistence on actual data rather than just forecast data, especially given their inflation expectation forecast was repeatedly missed or undershot from 2012 to 2020. Over the 10 years up to the pandemic we saw disinflation digging in its heels, which explains the Fed’s caution on making moves on rates based on inflation data.
The second key component of AIT lies in its four words: Average Inflation over Time. What really matters for the Fed is for inflation to take hold and be sustained. Therefore, the Fed is likely to look at inflation prints over an extended period, at least 3 years, rather than just a few inflation data releases. Looking at 3-year rolling core personal consumption expenditures (PCE) for instance would be more appropriate. This measure is likely to stay below the Feds 2%-target in 2022 – hence the Fed’s patience. It is needless to say that the hurdle rate for rate hikes due to inflation is extremely high under the new Fed framework and that this year’s US treasury rates move was unwarranted.
Tapering unlikely to happen before well into 2022
Since the Fed was quite vocal about being patient this year in light of their new AIT framework and about not acting pre-emptively based on forecasts but wanting actual data, they might choose to reinforce the framework by addressing a persistently uneven employment picture alongside a low average inflation environment. The theme of this year’s symposium “Economic Policy in an Uneven Economy” seems to support this view as it supposes a focus on the uneven employment picture and rising inequality driven by technological and digitalization advances. This implies that the Fed would be unlikely to consider reducing asset purchases unless the labor market manages to achieve broad-based and inclusive gains.
Governor Brainard was quite clear on the subject, actually. In assessing substantial further progress on tapering, she said she would like to see “indicators that show the progress on employment to be broad-based and inclusive, rather than solely focusing on the aggregate headline employment rate”. Her most recent remarks on July 30 in Aspen, Colorado, indicated that unemployment remained high and that employment continued to fall disproportionately among African Americans and Hispanics and lower-wage workers in services. According to her office, there was still a significant shortfall in prime-age low-skilled workers and in black individuals in June amounting to a shortfall of 9.1 million jobs compared to the pre-pandemic trend – a special indicator closely watched by the Fed.
Given this backdrop, tapering asset purchases might well be talked about at this year’s symposium but not actioned upon until well sometime in 2022, especially given Powell’s discussions on low employment and inflation in March 2021: “We had low unemployment in 2018, 2019 and the beginning of 2020 without troubling inflation at all”. This could motivate him to slightly delay tapering to ensure that the recovery in employment is more even on a more definite basis.
Delta variant could delay tapering even further
Another reason to delay tapering are the downside risks associated with the Delta variant of the COVID-19 virus. In many areas, vaccination rates are not as high as one would have hoped and may dampen the rebound in the services sectors that account for three fourth of the shortfall in jobs according to Ms. Brainard. This would suggest that we still have some distance to go in achieving substantial further progress in employment before the Fed begins to slow asset purchases.
It is worth remembering that after the Great Financial Crisis of 2009, broad based labor market conditions only showed very slow improvements despite the Fed being accommodative and quite patient. This could repeat itself this time around especially given the greater advances and rapid implementation in digital structures in the global economy. With regards to Europe, the European Central Bank (ECB) is likely to follow in the Fed’s footsteps given that the polarization of the job market is also a key concern of ECB President Lagarde.
Markets could end up surprised about the Fed continuing its asset purchases until actual broad-based gains in employment have been fully achieved. This is because markets tend to focus on aggregate headline measures which makes them think the Fed will start tapering in the relatively near term. Delaying tapering would reinforce the Fed’s dovishness which would be supportive of both government and corporate bonds, especially investment-grade subordinated structures and higher yielding bonds. Overall, shifting the “lower-for-longer” regime seems difficult in an uneven and digital economy.
Bruno Cavalier, Chief Economist de Oddo BHF
The annual Jackson Hole symposium that brings together several central bankers runs from 26 to 28 August. This year, the symposium focuses on economic policy and inequalities (“Macroeconomic Policy in an Uneven Economy”) which resonates with the Fed’s new strategy aimed at more inclusive job gains. Jerome Powell is due to address the event on August 27 but there is no guarantee he will set out the tapering process in detail. The jury is still out ahead of the meeting of the FOMC of 22 September, which is more likely to see the announcement of a potential change of monetary policy (see p.1). By then, the Fed will have at its disposal another monthly report on jobs (3 September) and on CPI inflation (14 September). Key macroeconomic data to follow in the next few days include August preliminary PMI indices (23), existing home sales (23), new home sales (24), household consumer spending (27) and various regional manufacturing surveys.
Encouraged by the strong jobs numbers recently, the Fed seems to have brought forward slightly the timetable for tapering its asset purchases, the aim now being end-2021 rather than early 2022. Unlike in 2013, the year of the taper tantrum, the markets have never been under the illusion QE would last forever. Continuing these purchases could even generate undesirable side effects (excess liquidity that the Fed would have to reabsorb), adding little to the main goal of supporting the economy and asset markets. The official announcement is still to come. The September FOMC meeting is set to be a more suitable place than Jackson Hole.
Paolo Zanghieri, Senior Economist at Generali Investments Partners
In the second quarter US GDP grew at 6.5% annualized. Activity has returned to the prepandemic level, but it is expected to slow down as the fiscal measures supporting consumption are mostly ending.
The data over the coming weeks will give a glimpse of how the economy is adapting. Crucially they will show how big is the risk from the new strain of virus: new cases are at the highest level since February and some states are nearing full capacity for intensive care beds. So far, high frequency data on shopping malls and restaurants occupancy haven’t shown signs of distress: the data on personal consumption in July (due on Fri. 27) will be closely watched.
The evolution of the Delta variant will be key for the Fed too. The minutes of the July meeting hinted that tapering could begin already at the end of the year. In his speech at Jackson Hole (Friday) chair Powell will probably take stock of the progress of the economy and give partial guidance on the next steps. The final decision will depend on the continuation of the strong progress in employment seen over the last months. In this sense the August employment report (due on Friday 3 Sept.) will be crucial.
Yves Bonzon, CIO, Julius Baer
Market expectations for a clear signal from the Chair of the US Federal Reserve (Fed) at the upcoming central bank symposium will most likely be disappointed. Reading the minutes of the last Federal Open Market Committee meeting in early July, it becomes evident that members have no more insight into the nature of inflation or the state of the labour market than we do.
Concerns about equity valuations and the real estate market conflict with reports about a lack of credit supply to small companies and, more prominently in the Fed’s recent comments, the downside risks to the economy from the delta variant of the coronavirus.
The latter becomes more visible by the day: high-frequency data on air traffic or restaurant bookings is declining as US consumers are becoming more cautious again. Against this backdrop, Fed Chair Jerome Powell would be well advised to keep all options open and avoid making a clear statement on Friday. We therefore do not anticipate a massive move in the US Treasury market, where the scarcity of safe assets is still the driving force, and maintain our positioning in moderate credit risk.