The Fed’s Powell is likely to give little advice on the tight bond buying schedule

August 26 (Reuters) – Federal Reserve Chairman Jerome Powell’s long-awaited speech at the Jackson Hole economic conference on Friday is likely to offer little advice on when the US central bank may begin to reduce its massive purchases of assets, analysts said.

But Powell could tackle the delicate task of explaining why reducing the $ 120 billion in monthly Treasury and mortgage-backed purchases does not mean an imminent rise in interest rates, which advanced the efforts of policymakers. of the Fed to prevent traders from raising borrowing costs more than it might be for the central bank to be justified or healthy for an economy with millions still unemployed.

“He’ll do his best to say they’re independent decisions … and one doesn’t necessarily speed up the other,” said Steve Kelly, a professor at the Yale School of Management. “This is the biggest challenge … this communication around speed reduction and rate reduction.”

Fed officials agree.

The minutes of the July 27-28 political meeting show that many thought it would be important to stress that there is no “mechanical link” between the reduction in price reductions and the rise in prices.

Rejecting this link will not be easy. Many Fed officials also felt it would be best to end the bond-buying program before raising rates. And they continue to debate whether to mark purchases quickly or stretch them, maybe up to eight months.

In addition, some policymakers argue that bond purchases don’t help anyway, as they aim to bolster demand, but they can’t cope with the bottlenecks companies face as they struggle to meet that demand, as that the economy reopens quickly.

With so much concern, the odds were always long for Powell to use his statements at the Fed’s central banking conference in Kansas City, which usually takes place in Jackson Hole, Wyoming, but is held for the second year in a row. satisfy investors. desires to know the details of the chronology.

This is especially important now, as the growing variant of the coronavirus Delta shows signs of a slowdown in the U.S. economic recovery, especially in the regions of the country most affected by infections. read more The data raises new questions about what appeared to be an emerging internal consensus at the Fed meeting last month to begin withdrawing its extraordinary support for the economy later this year.

Even the Dallas Fed, Kaplan, among the main supporters of the central bank of a first taper, said last week that it is beginning to see signs of Delta’s impact and will keep an open mind in preparing for the Fed policy meeting next month. Read more

“It’s hard to imagine the Fed committing to a specific reduction schedule in light of the ongoing public health crisis,” Jefferies economist Aneta Markowska said of Powell’s upcoming speech.

Powell, who will have to speak by webcast at 10 a.m. EDT (1400 GMT) on Friday, can recognize the progress of the economy toward full employment, Markowska and other economists said. While Powell will want to keep the door open to start reducing taper in November, he will be “very cautious” in closing that timeline, Goldman Sachs economists said in a note this week.

COMPLICATED MESSAGE

Economists surveyed by Reuters expect the U.S. economy to add 725,000 more jobs this month, in addition to the nearly 1.9 million earned in June and July. And inflation, a new reading to be published shortly before Powell’s speech, has been above the Fed’s 2% target for months, although most US central bank policy makers expect will moderate later this year.

The data suggests to many Fed policymakers that the economy is about to make “substantial progress” toward full employment and 2% inflation, the bar they have set before agreeing to buy monthly assets .

But to preserve low long-term interest rates for an economy that is still recovering from the downward trend triggered by the pandemic, Powell will also want to stress that the hurdle to reducing the intensity is timid to meet the trigger of three parts of the type rises. The bar to raise borrowing costs actually includes reaching full employment and seeing inflation well above 2% for some time.

“Right now it’s a complicated message,” said Tim Duy, chief economist at U.S. SGH Macro Advisors. “The reality is that speed reduction is not separate from rate hike: once you start speed reduction, you start a rate hike clock.”

And yet, it’s this kind of gun-jumping reaction that Powell will want to start. In 2013, when then-Fed Chairman Ben Bernanke tried to smoothly foreshadow a forthcoming reduction in bond purchases, traders responded by raising long-term rates so intensely that the Fed eventually went having to delay the reduction of their purchases.

Markets typically judge Fed communications more harshly in these policy shifts. If they did, it could be an awkward time for Powell, as U.S. President Joe Biden weighs in on whether to appoint him four more years as head of the Fed.

Despite the deteriorating Wall Street ratings, it is clear that the Powell-led Fed is on its way to shrinking, even if its speech this week is expected to offer little news on when exactly.

Even the bad president of the San Francisco Fed, Mary Daly, said last week that she is confident that the economy will meet the bar set by the central bank to begin reducing its support later this year.

“The key message is that it’s time to really think about stepping back that level of support we’re giving to the economy because the economy is really on its feet,” Daly said in a virtual interview with Barron’s roundtable . however, it would be “open-minded” about the impact of the Delta variant and could be delayed next year.

Report by Ann Saphir Edited by Paul Simao

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