As we noted in our Jackson Hole preview report last week, the ship had long sailed on any immediate taper announcement from Fed Chairman Powell. That said, traders were always going to “read in between the lines” of his highly-anticipated keynote speech to calibrate their expectations for the central bank’s taper plans, as well as its general outlook on the economy and inflation.
Never one to rock the boat dramatically, Powell clearly took a cautious, non-committal approach in his address. Highlights from the speech follow [emphasis mine]:
- 'CLEAR PROGRESS' TOWARD MAX EMPLOYMENT
- COULD BE APPROPRIATE TO START TAPER 'THIS YEAR'
- TAPERING DOESN’T CARRY DIRECT RATE-HIKE TIMING SIGNAL
- PREMATURE POLICY TIGHTENING NOW COULD BE 'PARTICULARLY HARMFUL'
- RECOVERY HAS SEEN 'SHARP' AND CONCERNING INFLATION SURGE
- MUCH GROUND TO COVER TO REACH MAXIMUM EMPLOYMENT
- INFLATION HAS MET THRESHOLD TO OPEN DOOR TO TAPER PROCESS
Especially after a run of hawkish comments from other Fed policymakers arguing for an imminent start to tapering, Powell’s comments preserved the central bank’s optionality to announce an explicit taper plan at its September, or more likely the November or December, monetary policy meetings. In particular, Powell’s warning about the risks of premature tightening and repeated reference to “much ground to cover” to reach the Fed’s employment objective hint that the Fed may be on hold until Q4 at the earliest.
Market reaction
For traders who were speculating about a late hawkish shift by the Chairman, Friday’s more wishy-washy comments served as a bucket of cold water. The US dollar shed an immediate 20 pips against most of its major rivals, with the US dollar index hitting a 10-day low beneath 92.80 midday, finishing at 92.690. Meanwhile, index and bond traders were enthused by the potential for continued stimulus, with the S&P 500 and NASDAQ 100 hitting fresh record highs while the yield on the 2- and 10-year Treasury bonds both fell 2bps to 0.22% and 1.31% respectively.
Given Powell’s ongoing emphasis on the labor market, the next few Nonfarm Payroll (NFP) employment reports, including next Friday’s, will be particularly significant in determining the timing and pace of the central bank’s tapering plans. For now, dollar bulls will have to wait for further signs of improvement in the labor market before a potential breakout to new 9-month highs.