Wall Street is going to cling to every word spoken this week at the nerdiest of economic nerdfests.
The Federal Reserve will divulge its thinking about the next months and years’ worth of monetary policy at Friday’s virtual Jackson Hole Symposium.
For analysts, the annual resort hangout for central bankers represents a chance to get a real sense of where the Fed is headed: When will the central bank taper its monthly buying spree of securities? When will interest rates go up?
It’s a must-watch if you’re a serious investor, not least because the symposium comes at a time of rising Covid cases due to the more infectious Delta variant and softening economic data.
The main focus will of the event will be on Fed Chairman Jerome Powell’s economic outlook speech on Friday at 10 am ET.
All about the taper
The taper question — when the Fed will ease off the economic stimulus gas pedal — has been on investors’ minds for months.
Faster-than-expected inflation in the first half of the year spurred worries the Fed would roll back its monthly asset purchases of about $120 billion sooner than hoped. The minutes from last month’s policy meeting added fuel to the fire, sending the market into a selloff tizzy early last week, before it recovered this week.
“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year,” the minutes from the central bank’s July 27-28 meeting said.
Goldman Sachs (GS) has moved its prediction for when the Fed will start tapering to November from December on the back of these minutes, expecting a $15 billion taper per meeting, starting with a formal announcement in November.
Even though every investor under the sun will be listening for any and all taper talk at the end of the week, those hoping for groundbreaking revelations might wind up disappointed.
“We expect the September FOMC meeting to be the main event where Powell more substantially sets the predicate on tapering, not Jackson Hole,” said RSM Chief Economist Joe Brusuelas.
For the Fed, waiting at least until next month has its benefits, including another look at the labor market with next week’s jobs report. Another strong report could strengthen the case for the tapering to get going.
Is inflation here to stay?
But even if Powell doesn’t set a firm date for tapering on Friday, there is still plenty he could clarify.
When inflation started to jump, the Fed introduced the market to its favorite word: transitory. That means prices are rising largely because of temporary factors as the economy reopens and the world copes with supply chain issues.
Although the Fed is still mostly on the transitory train, the July meeting minutes noted that several officials believe the worse-than-expected supply chain disruptions could keep pressure on prices into next year.
So which one is it? Transitory, or not really? Wall Street investors are hoping Powell and other Fed officials will shed a little light on the issues Friday.
Low yield world
The Fed’s monthly asset purchases have kept bond yields low for the most part. Buying $80 billion worth of Treasury securities every month will do that.
Even when yields on the 10-year Treasury bond spiked to their highest since before the pandemic earlier this year, pushed up by worries about an overheating economy and higher inflation, yields were really still quite low.
So what might happen when the Fed scales its monthly buys?
“With less central bank buying, bond yields will likely rise globally, but not too much,” said John Vail, Chief Global Strategist at Nikko Asset Management.
From a stock market point of view, it could be a reason for cyclical and financial stocks to perform well, Vail added.
For the market as a whole, a more hawkish Fed would likely weigh on the rally that propelled stocks to record highs once again this week.