Why Jerome Powell's business-as-usual Jackson Hole speech was the best possible outcome
FedChair Jerome Powell's annual Jackson Holespeech was uneventful, but that's not a bad thing.
- Powell reiterated the Fed could start
taperingits asset purchases this year and rates aren't changing soon.
- Stocks hit record highs during the speech as investors shrugged off fears of an early pullback in Fed support.
The central banker said Friday that the Fed could begin shrinking its emergency asset purchases this year, reaffirming the outlook shared by most Fed policymakers at a late July meeting. He also hinted that interest rates will stay near zero for the foreseeable future. The surge in Delta cases endangers the recovery, but strong employment data and still-healthy spending suggest the rebound is so far intact, he added.
"At the FOMC's recent July meeting, I was of the view, as were most participants, that if the
Yet for such a newsless speech, initial reactions have been positive. Stocks spiked to record highs, with investors reassured that tapering won't begin any sooner than late 2021. The Fed's ultra-accommodative policy helped drive stocks higher throughout the pandemic, and investors are already bracing for that support to fade. Equities slid earlier this month after Fed meeting minutes first hinted tapering could start this year.
The absence of additional detail from Powell suggests markets can enjoy the Fed's asset purchases for at least a while longer, and maybe even into 2022 if the Delta wave worsens.
"The song remains the same," Ian Shepherdson, chief economist at Pantheon Macroeconomics said. "We still think it's reasonable to expect the tapering announcement in November, but it could easily be delayed if the post-Delta rebound takes longer than we expect."
The stay-the-course speech was likely well received by businesses as well. The purchases, when combined with historically low rates, allowed firms to borrow for cheap at a time of intense economic strife. Once the Fed starts to taper its support, that period of unusually low borrowing costs will fade.
To be sure, businesses are increasingly ready for the Fed to pull back. Fifty-two percent of the business community believes the Fed's monetary policy is "too stimulative," according to an August survey conducted by the National Association of Business Economics. That's up from just 26% in March. Meanwhile, 47% said the Fed's stance was "about right" in August, down from 72% in March.
And while tapering represents a reversal of the Fed's economic support, Powell reiterated that the labor market's recovery still needs help. The country has made "clear progress" toward maximum employment, but not enough to warrant a rate hike. Mistiming rate changes can prematurely slow hiring, and the US has "much ground to cover" before the labor market is fully healed, Powell said.
"The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test," he added.
For such an uneventful speech, Powell made all the right assurances. The Fed has tapering on the brain, but its safety net is still very much intact.
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