Heather Scott (AFP)
Washington, DC ●
Fri, August 27, 2021
With the U.S. economy recovering from the worst of the pandemic, global financial markets are looking forward to Fed chairman Jerome Powell’s speech on Friday to see if he details plans to reverse the central bank’s massive stimulus measures will describe.
However, concerns about the economic impact of the rapidly spreading delta variant of the coronavirus could make an announcement at the annual central bank symposium in Jackson Hole premature.
“Powell’s speech is unlikely to provide groundbreaking insight,” said veteran Fed observer Mickey Levy of Berenberg Capital Markets.
When Covid-19 changed the world’s largest economy last year, the Fed jumped into action to prevent a major recession, cutting interest rates to zero in March 2020, and buying huge amounts of government bonds and mortgage-backed securities from agencies to bring liquidity to the financial markets provide system.
These programs likely saved the United States from a worse downturn, but were never meant to be permanent.
The Fed has announced that it will slow down the pace of its massive asset purchase program and then raise the benchmark interest rate – although no action on the latter is expected in the near future, possibly for years, while the former is seen as a delicate task.
“It is very likely that Powell’s speech will stick to the Fed’s most recent script to tiptoe to separate the unwinding of their asset purchases from an eventual rate hike,” Levy said in an analysis.
More jobs, higher inflation
Widespread vaccination has allowed businesses to fully reopen in the United States, restoring millions of jobs and bringing the unemployment rate down to 5.4 percent last month, much closer to pre-pandemic levels of 3.5 percent.
But labor shortages and shipping problems have resulted in supply bottlenecks and fueled inflation to around four percent, though Fed officials are seeing this eventually wear off.
Central bank rulers have stated in the past few days that they prefer to withdraw their current $ 120 billion monthly bond purchases, though some added a caveat that the Delta variant could cause a delay.
Kansas City Fed Bank President Esther George, host of the Jackson Hole conference and widely recognized as an inflation hawk, said Thursday that the strong data suggests “there is an opportunity to roll back asset purchases.”
But in an interview with Fox Business Network, she hinted that the details may have to wait for “the communication … from our September meeting”.
The organizers intended to bring the conference back to its usual personal format, but due to the rise in Covid-19 infections, this week announced that it will be held virtually for the second year in a row.
Powell’s main concern is to do the tapering without repeating the freak-out the central bank attempted last time after a crisis.
The Fed first resorted to bond purchases – known as quantitative easing (QE) – after the financial system froze during the global economic downturn in 2008.
But when then Fed chief Ben Bernanke hinted in 2013 that the time for QE to slow down was approaching, markets rebelled, forcing the central bank to delay normalization efforts.
Powell has made repeated promises to give early notice to markets before easing purchases, but it will not be easy.
“He’s on a knife edge,” Grant Thornton’s economist Diane Swonk told AFP.
“The best way to prevent a taper tantrum is to create a roadmap for tapering off-ramps when variants are more likely to disrupt demand than supply chains,” she said.
But “he cannot ignore these risks and go ahead with the tapering.”