The Fed’s Jackson Hole Update

Last week Fed Chair Jerome Powell gave a closely watched speech at the Fed’s annual Jackson Hole, Wyoming, symposium. Powell indicated that the Fed was leaning in the direction of scaling back aspects of its easy money policy, but that it would maintain low rates as it perceived that employment growth still had significant room to run.

So what will the Fed do? Powell indicated that by the end of the year the Fed is likely to begin tapering its asset purchase program, which means that it would reduce the amount of bonds it buys each month. The tapering announcement could come as soon as the Fed’s September meeting.

However, Powell explicitly stated that this tapering was not meant to function as a signal of impending rate hikes. He stressed that the Fed had a different, more stringent test to determine the appropriate start time of an interest rate liftoff. Powell’s speech was generally on the positive end of market expectations, as stocks rose modestly, and rates declined slightly afterwards. 

Interestingly, despite the Fed’s recent underestimation of inflation, Powell maintained his argument that this inflation was largely due to supply shocks and was likely to be transitory, despite suggestions (e.g. at https://www.nytimes.com/2021/08/30/business/supply-chain-shortages.html) that supply chain issues may persist longer than anticipated. Powell could have made the alternative argument that after years of inflation undershooting the Fed’s 2% target, he would be content with inflation remaining moderately above 2% for some time. Not making that argument could imply that the Fed is more comfortable when inflation falls below target than when it rises above, or perhaps merely that the Fed is wary of stepping into a political minefield by asserting that reflation is beneficial.

In any event, the Fed is maintaining its increased emphasis on letting the labor market run hot so as to reach maximum employment, and we’re unlikely to see a rate increase until at least 2022.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation.  Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.