For analysts, the annual meeting of central bankers represents a chance to get a clear idea of the direction the Fed is taking: when will the central bank reduce its monthly securities buying spree? When will interest rates go up?
This is a must-see if you’re a serious investor, especially because the symposium comes at a time when Covid cases are on the rise due to the more infectious Delta variant and softening economic data.
The main focus of the event will be the economic outlook speech by Fed Chairman Jerome Powell on Friday at 10 a.m.ET.
Everything about the cone
The question of the reduction – when the Fed releases the accelerator pedal of the economic stimulus – has been on the minds of investors for months.
Faster than expected inflation in the first half of the year raised fears that the Fed would cancel its monthly asset purchases about $ 120 billion earlier than expected. Minutes from last month’s policy meeting added fuel to the fire, sending the market into a dizzy liquidation early last week, before recovering this week.
“Various participants noted that economic and financial conditions would likely justify a reduction in the coming months. Several others, however, indicated that a reduction in the pace of asset purchases was more likely to become appropriate at the start of the year. next, “says the central bank report. July 27-28 declared the meeting.
Goldman Sachs (SG) shifted its forecast of when the Fed will start shrinking to November from December following those minutes, expecting a cut of $ 15 billion per meeting, starting with an official announcement in November.
While all investors in the sun will be tune in to all the talk on the tap at the end of the week, those hoping for groundbreaking disclosures might be disappointed.
“We expect the September FOMC meeting to be the main event where Powell more substantially defines the predicate on reduction, not Jackson Hole,” said RSM chief economist Joe Brusuelas.
For the Fed, waiting at least until next month has its advantages, including another look at the job market with next week’s jobs report. Another strong report could strengthen the case for starting tapering.
Is inflation here to stay?
But even if Powell doesn’t set a firm date for the reduction on Friday, there is still a lot he could clarify.
When inflation started to surge, the Fed presented the market with its favorite word: transient. This means that prices are rising largely due to temporary factors as the economy reopens and the world grapples with supply chain issues.
While the Fed is still mostly in the transitional train, minutes from the July meeting noted that several officials believe worse-than-expected supply chain disruptions could keep price pressure on until the end of the day. ‘next year.
Which one is it then? Transient, or not really? Wall Street investors are hoping Powell and other Fed officials shed light on the problems on Friday.
Low Yield World
The Fed’s monthly asset purchases kept bond yields low for the most part. Purchase $ 80 billion in treasury securities each month will do this.
Even when 10-year Treasury bond yields hit their highest level since before the pandemic earlier this year, driven by worries about an overheating economy and higher inflation, yields were really still pretty low. .
So what might happen when the Fed increases its monthly purchases?
“With fewer central bank purchases, bond yields will likely rise globally, but not too much,” said John Vail, chief strategist at Nikko Asset Management.
From a stock market perspective, this 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 took stocks to record highs this week.
