Jackson Hole, Wyoming

The Federal Reserve is scheduled to meet three times over the next three months. Of these, the gathering generating the most watercooler chit-chat is the prestigious Jackson Hole policy symposium in August, an annual retreat of the world’s most notable central bankers and economists.

Just days ago, the Fed’s Chairman Powell stated it was too early to re-think the current interest-rate policy, sparking speculation that August would be the perfect time to make the case for tapering.

With the US economy displaying a drastically improved job market (but still underwhelming) and spiking inflation rates, the heat is officially on to exit QE. Whether Powell will have the data to support such a move, which would likely be followed with adjusted policies in September, remains to be seen.

Powell is the Chair of the Federal Open Market Committee (FOMC) and rarely speaks directly in this capacity (“Fedspeak” is alive and well). If the anticipated announcement is made, it’s a clever way to test the waters. Should Powell’s verbal warning of a quantitative easing exit strategy spook markets, triggering stocks collapsing and yield rising (as in 2103 “taper-tantrum”), then the Fed can back-out before having to actually take action.

The question that remains is whether the labour markets warrant tightening. 916,000 new jobs were reported in March, with markets poised to follow with similar gains in subsequent months. However, two consecutive months of weaker-than-expected job increases fall short of the 1 million that would indicate the ‘substantial further progress’ Powell suggested would justify tapering.

The payroll report is considered an indicator of how the US economy is performing. It’s possibly never been more closely watched than now as the nation recovers from the economic decline brought on by the pandemic. The longer-term effects of lockdown may still be evident in the prolonged stagnation of the labour markets.

St. Louis Fed James Bullard stated the projections for huge employment improvements in the spring were premature, given the lingering effects of the pandemic and issues surrounding childcare.
Danielle DiMartino Booth, a former adviser to the Dallas Fed, suggested the Fed may begin to lay the groundwork for a quantitative easing taper led by mortgage-backed securities.
In the same way the Fed has had to determine whether the recent spike in inflation is transitory or a lasting phenomenon, officials will need more time to separate signal from noise in the promising job market data.

While we can only make educated guesses at the direction Powell’s remarks in August will take, what we know for sure is that his words will have a profound effect on autumn trading.