So much for the taper tantrum

The dreaded “taper tantrum” has turned out to be a “taper whimper”, says Will Denyer of Gavekal Research. US Federal Reserve chairman Jerome Powell’s speech at the Jackson Hole conference confirmed plans to cut monetary stimulus later this year. You would expect liquidity-addicted investors to be upset by that prospect, but they took the speech “in their stride”.

Taper yes, rate hikes no

The Jackson Hole “jamboree” had been “looming over the market for months”, says Katie Martin in the Financial Times. The event often sees a central banker “say something silly” that upsets traders. Powell chose to play it safe, allaying concerns about overly hasty monetary tightening.

The Fed is currently buying $120bn-worth of US government bonds and mortgage-backed securities (MBS) with printed money every month as part of its emergency response to the pandemic. With the recovery under way it needs to start cutting back (or “tapering”) that support. But it is a treacherous path: in 2013 a similar move by then-chair Ben Bernanke triggered the “taper tantrum”. The resulting turmoil saw bond yields spike and emerging-market stocks sell off.

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Jerome Powell has not repeated Bernanke’s mistakes. He has so far skilfully “avoided miscommunication” of the type that caused the 2013 tantrum, says John Authers on Bloomberg. Stocks rose following the speech; markets had feared Powell might announce a more rapid tightening of monetary policy. Instead, he remained vague on the exact timetable for tapering and made clear that outright interest-rate rises were still a distant prospect. “He managed to couple confirmation that a taper is imminent with reassurance that rake hikes aren’t.” Markets reacted positively. The Nasdaq and S&P 500 indices rose to new record highs. The latter is up by more than 22% so far this year. US government bond yields fell (bond prices move inversely to yields).

How to talk like a central banker

Powell’s speech had “something for everyone”, says Lisa Beilfuss in Barron’s. “Hiring is strong but could be better; the Delta variant may or may not be [a] problem.” Every line that hinted at future monetary tightening “was caveated by a reminder of why it isn’t” imminent. The only theme Powell really insisted on was the idea that high inflation is transient. Much now rests on what happens in September, when economists hope reopening schools will ease America’s labour shortages: “the labour shortage is the root of the everything-shortage” that is driving prices higher. The spread of the Delta variant in America may prove a “wild card” that determines whether that happens or not.

Powell’s speech was an exercise in stalling for time, says Paul Ashworth of Capital Economics. He has resisted pressure from colleagues who want tapering to begin within weeks. We think the Fed will wait until its November meeting “to announce a $15bn reduction in the monthly pace of its Treasury securities purchases and a $7.5bn reduction in MBS purchases”.