Fed ready to cut back on asset purchases this year

This confirmation was eagerly awaited by the markets. The Fed has made tapering of its asset purchases its next priority. Its president, Jerome Powell, inaugurated this Friday the annual Jackson Hole symposium, held virtually for the second year in a row. His speech left no doubts about his desire to reduce the intervention of the Federal Reserve in the economy (today around 120 billion dollars per month).

“At the July Monetary Policy Committee, I was of the opinion, like most participants, that if the economy develops as expected, it might be appropriate to start reducing the pace of asset purchases this year.” , explained Jerome Powell. According to him, the unemployment figures have pointed in this direction, even if the Delta variant poses threats to the recovery. Household consumption thus slowed in July, according to figures released on Friday. Consumer spending rose only 0.3% from 1.1% in June, pointing to risks to growth in the third quarter.

Awaiting August figures

For Subadra Rajappa, analyst in charge of rate strategy at Societe Generale, “the employment figures in August will be very important for decisions in the coming months. The latest figures have confirmed the Fed’s policy, with a solid average of 800,000 jobs created per month over the last three months. The reduction in asset purchases could take place at the November meeting. Jerome Powell has not provided an indication of the timetable, which makes it less likely that an announcement will be made at the next meeting, which will be held on September 21 and 22.

Bank of America expects 600,000 new jobs created in August, a slowdown that can be explained by the progression of the Delta variant and certain restrictions applied locally. “This figure should be low enough for the Fed to wait for additional data before embarking on the reduction in purchases,” said its analysts in a note. However, if the Delta variant forced the Kansas City Fed, which holds the central bank mass every year in Wyoming, to change its plans at the last minute, it is not according to Jerome Powell a threat to long term for the return to full employment.

A certain wait-and-see attitude therefore remains in order. “The cautious attitude of Jerome Powell and the Fed governors, who seem to favor an announcement in November and a starting point for the decline in asset purchases in December, contrasts sharply with the estimates of regional Fed presidents”, ING note.

For Jeremy Lawson, chief economist at Aberdeen Standard, this ambiguity is dangerous. “If the Fed is not even clear on what it is aiming for and how it will behave under different circumstances, it is just layering layers of uncertainty. This forces investors into a guessing game leading to increased volatility and a huge waste of resources, ”he explains.

Temporary inflation

The Fed chairman was also expected on the Fed’s other target, keeping inflation around the 2% target. Last year at Jackson Hole, he presented a new strategy. It takes long-term inflation into account, making it possible to temporarily deviate from objectives, in particular to compensate for periods when it has evolved well below its target. However, the latter has reached, or even exceeded, 5% over the last three months.

But Jerome Powell remains convinced that these are temporary phenomena, due in particular to pressure on the distribution channels. “Answering it could do more harm than good,” he said. Interest rates should therefore remain close to zero for a few more months.

Investors reacted rather favorably, but without delusional enthusiasm to Jerome Powell’s speech, the main lines of which they had anticipated. At midday, on Wall Street, the S&P 500 was gaining 0.8% and the Nasdaq 1.1%. The 10-year Treasuries rate (government bonds) was down 4 basis points to 1.31%. The president of the Fed has at least succeeded in one bet: that of announcing a “tapering” without causing panic in the markets.

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