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One of the most anticipated events of August has happened. Jerome Powell spoke at a symposium in Jackson Hole. The market was waiting for the Fed chief to shed light on the Fed’s further actions on the timing and conditions of the reduction of the quantitative easing programme.
S&P500
What we can take for ourselves from Powell’s speech. Firstly, Powell de-escalated the markets by saying that by the end of this year there will be a concrete consideration of reducing the quantitative easing programme.
Secondly, Powell said that the end of the QE programme does not mean that interest rates will automatically start to rise. This is important because a sharp rate hike is not at all good for investors, who are now investing in risky assets rather than the US dollar.
Jerome Powell commented that the main objectives for winding down the quantitative easing programme were to increase inflation and reduce unemployment. The inflation target has been met. On unemployment, there is “significant progress” in getting closer to maximum employment. Powell reiterated the conclusions of the minutes of the last Fed meeting, which stated that QE rollback could begin by the end of 2021, but no specific timeline was given in his speech. The markets had high hopes for it, therefore the heads of the federal banks urged to start a rollback as soon as possible, almost in October.
As for the interest rate, Powell explained that cutting QE would not instantly affect the interest rate. Rates will remain at their minimum values as long as employment reaches its maximum values, which are still a long way off.
The markets reacted positively to Powell’s speech, probably because there were no harsh statements in it. Back in June we forecasted that most likely in summer the Fed would not make any serious decisions on the quantitative stimulus programme and we were right. Summer and the holiday season is coming to an end. Most likely, the Fed will announce at its next meeting, which will be on 21-22 September, when the program will start to be wound up. Although much depends on the economic data that will be released during this month.
01.50 Japan’s retail sales YTD
14.00 Germany’s harmonised consumer price index YTD
16.00 Unfinished US Home Sales for July
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