*Written August 31st
The market waited for this year’s Jackson Hole Symposium with bated breath but was relieved to find Jerome Powell’s speech largely a non-event. After positive jobs reports in recent months, the Fed is likely waiting for August’s jobs report before making a solid timeline for tapering and the Fed Chair is clearly not interested in ruffling the market with any premature statements.
The Delta Variant is an added stimulus for slowly easing the Fed’s easy money policy since the variant has stifled progress among real-time economic data/indicators such as airline travel, restaurant bookings, and claims for unemployment benefits. Overall, the variant has yet to have a national impact but Moody’s Analytics Back-to-Normal Index has captured the impact to states like Florida which have seen rising cases and hospitalizations. This has given Powell adequate cause to holdoff on the inevitable taper as even the Jackson Hole Symposium was abruptly shifted to virtual due to health concerns.
Coinciding with the Jackson Hole Symposium, the Supreme Court decided to end the CDC’s moratorium on evictions which was revised this month to only include tenants who make under $99 thousand per year. Although the Biden administration expressed its disappointment with the decision to block its ban on evictions, the market’s response has yet to be seen. According to the Census Bureau’s August report, nearly 8 million households were not up to date on their rent but estimates for those at risk of losing their homes are closer to 15 million.
While the majority of people who lost their jobs as a result of COVID-19 shutdowns and other restrictions in early 2020 have now returned to work, many still struggle to pay the debts – including back rent – that accumulated while they were unemployed. This is likely to weigh heavily on the Fed’s taper timing and the market has responded well to Jerome Powell’s dovish statements at the Jackson Hole Symposium. His speech immediately gave a boost to stock indexes while driving the value of the U.S. dollar down in comparison to other currencies.
Jerome Powell’s Speech
Considering the positive jobs reports and the greater than expected pace of economic recovery, some had anticipated that tapering would be announced sooner rather than later – especially given the hawkish remarks of non-voting Fed members. Instead, Powell highlighted the need for a well-timed easing while de-escalating inflationary concerns. Inflation has become a hotly debated issue as consumers watch a rising Consumer Price Index (CPI) after seeing inflation reach a rate 4.2% higher than that of July 2020.
Repeating that the rise in inflation is merely transitory, Powell explained that demand is greater than the supply “pandemic-afflicted” supply chains and bottlenecks are allowing. As a result, durable goods such as appliances, furniture, and cars have seen a spike in inflation. However, these inflationary concerns are only specific to a “relatively narrow group of goods and services”. Energy prices have been another contributing factor, adding 0.8% to headline inflation. Powell highlighted that until the Fed sees inflationary pressures spread throughout the economy, their concerns with inflation above their 2% objective will remain limited.
His reasoning was largely rooted in the history of monetary policy which has occasionally done “more harm than good” by enforcing measures on temporary factors. The lag between tightening policy and its effects can result in slower hiring and other negative effects on economic activity as inflation is pushed lower than what is healthy for the market. In light of Delta Variant concerns and businesses still recovering from the pandemic, an ill-timed approach to monetary policy could be particularly damaging.
Trying not to unduly “spook” the market, Powell stopped short of giving a start date for tapering. In fact, Powell mentioned inflation 82 times throughout his speech – illustrating his effort to avoid a rerun of 2013’s ‘taper tantrum’. The takeaway message for many viewers was that although tapering is likely to be announced in the coming months and only begun later this year or the next, rate increases are not expected to be immediately tied to the tapering of bond buybacks.
Pointing to the various unknowns associated with the Delta Variant, Powell further stressed that the Fed will be making its decision based on incoming data pertaining to supply–demand imbalances and leveling inflation for goods and services affected by the pandemic. Saying that, “Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions,” Powell emphasized the Fed’s role in promoting price stability “as the economy works through this challenging period.”
While the Delta variant presents a near-term risk, recent jobs reports seem to indicate that prospects are good for continued progress towards the Fed’s other concern – maximum employment. However this seems to be contradicted by the record high number of job openings which have left employers struggling to find people to fill their positions. Compared to February 2020, there are 6 million fewer people employed – the majority of which is from the service sector. Despite bullish jobs reports, leaving these numbers unchecked will continue to impact consumer sentiment which fell 13.4% from July to August as inflationary fears and slower declines in unemployment contributed to the drop.
The timing of Jerome Powell’s dovish remarks and the Supreme Court’s decision are suspicious seeing as the bearish impacts of the former have been relieved by the latter’s. Knowing that tapering will be delayed for the foreseeable future has benefitted the market and investors can now relax before changing interest rates are priced into the market. This has also been beneficial for the Biden administration which is juggling a host of difficulties ranging from hurricane Ida to the US withdrawal from Afghanistan.
Similarly, the Supreme Court’s rejection of the eviction moratorium would ordinarily have caused fear in the market as investors anticipated the additional pressure on social services for those forced into eviction. Additionally, the housing market would experience a general cooling and the demand for building materials may also relax. In truth, hedge funds have been buying up real estate throughout the pandemic – in part contributing to rising home prices. If evictions occur on a large scale, then this may be an additional opportunity for hedge funds and rich investors to buy up more properties. Perhaps, Jerome Powell presented the Fed as rather ambivalent to rising inflation in light of the fact that ending these moratoriums will have a counter-inflationary effect on the market. If that is the case, then when rates are raised its effects could be amplified down the line.
However, the Fed is making a concerted effort to monitor the situation using the best, most relevant data available. While tapering is inevitable, the Fed is kicking the can down the road just a bit further to stave off market pressures.
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