Key takeaways
Fed Chair Powell in his Jackson Hole speech says that substantial further progress has been made on the inflation front to start tapering. On top, inflation at the current levels is a cause for concern if it spreads more broadly to the economy. US CPI inflation printed three consecutive months above the 5% mark. Powell specified that the higher inflation can be narrowed down for the moment to a couple of categories with no evidence of wage push inflation yet. On the employment front he says that clear further progress has been made, but that the substantial target hasn’t been met yet. Employment gains have come faster than expected and the outlook for the labour market has brightened considerably, but it’s turbulent. So overall, the economy has advanced towards the goals, but we’re just not there yet, according to the Fed chair. In this respect, next Friday’s payrolls report could be the final cue for a tapering announcement at the September 22 FOMC meeting. Powell pointed out that the spread of the Delta variant is a near term risk.
The Fed Chair gave no guidance whatsoever on the start of the tapering process but says that the timing of tapering asset purchases is not a direct signal to the timing of rate hikes. Market consensus currently expects a gap of 6 months between ending net asset purchases and starting rate hikes. Tightening too early could be particularly harmful according to Powell with the bar to start tapering being much lower than the bar to start hiking.
Markets
In the run-up the Fed Powell’s Jackson Hole speech several of his colleagues indicated that the time was probably right to start reducing bond purchases in the near future. However, this ‘hint’ was only partially picked up by the Fed Chairman. US yields were little changed to marginally lower just before the headlines of Powell’s speech hit the screens. The US yield curve currently loses about 3/4 bps with the belly of the curve outperforming (5-10y). The dollar, which tried a comeback on this week’s correction earlier in the session is again testing the lowest levels of this week. The trade-weighted index hovers near 92.80/85. EUR/USD is currently nearing the ST top at 1.1805. USD/JPY is losing the 110 handle (109.90). Equity investors draw comfort from the idea that any Fed policy normalization will only develop at a very gradual pace. US indices are rising between 0.60% (Dow) and 0.90% (Nasdaq). The Nasdaq and the S&P are setting now all-time record levels. Spill-over effects from the US bond market to the European bond markets are limited. European yields decline marginally (up to 1 bp for the German 10-y yield).
