Every word said this week at the nerdiest of economic nerdfests will be clung to by Wall Street.
At Friday’s virtual Jackson Hole Symposium, the Federal Reserve will reveal its thoughts on monetary policy for the coming months and years.
For analysts, the annual retreat for central bankers is a chance to get a true sense of the Fed’s direction: When will the central bank stop buying securities on a monthly basis? When do you think interest rates will rise?
It’s a must-see for serious investors, not least because the symposium takes place at a time when Covid cases are on the rise due to the more infectious Delta variant and economic data is softening.
The event’s main focus will be on Fed Chairman Jerome Powell’s economic outlook speech, which will take place on Friday at 10 a.m. ET.
For months, investors have been wondering when the Fed will take its foot off the economic stimulus gas pedal.
Inflation rose faster than expected in the first half of the year, raising fears that the Fed would reduce its monthly asset purchases of about $120 billion sooner than expected. The minutes from the Federal Reserve’s policy meeting last month added fuel to the fire, sending the market into a selloff frenzy early last week, before recovering this week.
“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year,” the minutes from the central bank’s July 27-28 meeting said.
On the basis of these minutes, Goldman Sachs (GS) has shifted its forecast for when the Fed will begin tapering from December to November, expecting a $15 billion taper per meeting to begin with a formal announcement in November.
Even though every investor in the world will be listening for any and all taper talk at the end of the week, those hoping for big surprises may be disappointed.
“We expect the September FOMC meeting to be the main event where Powell more substantially sets the predicate on tapering, not Jackson Hole,” said RSM Chief Economist Joe Brusuelas.
Waiting until at least next month has advantages for the Fed, including a second look at the labor market with next week’s jobs report. Another strong report could bolster the case for starting the tapering process.
Even if Powell does not set a firm tapering date on Friday, there is still a lot he could clarify.
When inflation began to rise, the Fed used its favorite word to describe the situation: transitory. As the economy reopens and the world deals with supply chain issues, prices are rising primarily as a result of temporary factors.
Although the Fed is still largely on the transitory side of the fence, several officials believe the worse-than-expected supply chain disruptions will keep prices under pressure into next year, according to the minutes of the July meeting.
Which one is it, then? Is it really transitory? Investors on Wall Street are hoping Powell and other Fed officials will shed some light on the situation on Friday.
For the most part, the Fed’s monthly asset purchases have kept bond yields low. This can be accomplished by purchasing $80 billion in Treasury securities each month.
Even when 10-year Treasury bond yields soared to their highest level since before the pandemic earlier this year, fueled by fears of an overheating economy and higher inflation, yields were still very low.
So, what happens if the Fed reduces its monthly purchases?
“With less central bank buying, bond yields will likely rise globally, but not too much,” said John Vail, Chief Global Strategist at Nikko Asset Management.
It could be a reason for cyclical and financial stocks to perform well in the stock market, according to Vail.
A more hawkish Fed would likely weigh on the market as a whole, dampening the rally that propelled stocks to new highs this week.