Has the Jackson Hole meeting changed the pace of reduction? -What’s on Wall Street

Hello everyone,

At 10 pm Beijing time yesterday, Fed Chairman Powell delivered a much-watched speech at the Jackson Hole Central Bank’s annual meeting. Since the July FOMC meeting has begun to warm up for weight reduction (“July FOMC: The Fed began to warm up for weight reduction “), and most of the Federal Reserve officials have recently spoken (“Eight Questions and Eight Answers on QE Reduction August 16~August 22, 2021”). There are many hawkish remarks among them. Therefore, this meeting was attracted by many investors. It is regarded as an important window to observe whether the Fed will give hints on reductions.

Judging from the actual effect, Powell did not surprise the market by surprise. In more than 20 minutes of speech,Powell reiterated7Month FOMCThere is not much information other than what the market knows in the meeting and minutes, and its statement that the timing and pace of the reduction is not directly related to the increase in interest rates also makes the market feel dovish.Thanks to this, market sentiment has been significantly eased from the minutes of the FOMC meeting in July and the hawkish statements of Fed officials. In this context, major assets reacted positively, the interest rates of the U.S. dollar and U.S. Treasury fell, and U.S. stocks, especially the Nasdaq index, rose sharply.

So, what signal does the latest Jackson Hole conference send? What impact will it have on the pace of future policies and asset prices? We comment on the latest changes as follows for investors’ reference.

What did Powell say at the meeting?Employment repair, temporary inflation, and whether there will be a reduction during the year to be assessed

Powell’s speech at the meeting yesterday was not long, and it was only about 20 minutes overall. It involved some views on the current economic situation, especially the future direction of monetary policy, and this is what the market is most concerned about. Specifically,

1) Employment.Powell believes that the US job market has also seen obvious positive developments recently. With the advancement of vaccination, the opening of schools, and the end of employment subsidies, some factors that hinder job hunting are expected to gradually fade.AlthoughDeltaThe recurrence of the mutant virus brings certain short-term risks, but the overall job market outlook is still good.

2) Inflation.First, Powell admitted that the current inflation is clearly at a worrying level.However, a number of factors that cause high inflation indicate that the current high inflation may be temporary.. Powell said that the current high inflation is still mainly concentrated in a few commodity prices.If it spreads further to a wider scope, it will put more pressure on the Fed.

Secondly, in some areas of high inflation, Powell said that price pressures have eased. For example, the gap between supply and demand for second-hand cars is expected to gradually improve. From the historical stage of the long-term cycle, durable goods prices have also weakened in the long-term. In the area of ​​wages, Powell said that there is not much information showing that rising wages will threaten rising inflation (the so-called wage-price spiral).Finally, Powell believes that long-term inflation expectations remain stable, and policies should not pay too much attention to short-term disturbances.。

3)Monetary Policy.Powell first stated that the historical experience of the 1950s and 1980s has two experiences for current policymakers. One is that monetary policy should not try to intervene to offset short-term price disturbances, otherwise it will be met after the temporary factors subsided. Growth has caused a drag. Second, the central bank cannot assume that temporary factors will inevitably fade away, such as inflation expectations in the 1970s.Powell expects that the following data is expected to provide more evidence of the easing of the contradiction between supply and demand and the easing of inflationary pressures.

In terms of future monetary policy, Powell believes that inflation has already met the Fed’s conditions for “substantial further progress”, and employment has also made some progress but has not yet been met.If the current economic situation is like7Month FOMCIf the situation seen at the meeting is the same, then Powell supports a gradual reduction within the year.(Appropriate to start reducing the pace of asset purchases this year). After the FOMC meeting in July, the non-agricultural employment announced in early August showed more progress, but the Delta mutation virus is also escalating, so the next data will be carefully assessed (carefully assessing incoming data and evolving risks). Powell also specifically stated,THATThe timing and pace of the reduction should not be too much related to the timing of future interest rate hikes.

in summary,Powell was yesterdayJackson HoleThe speech did not exceed 7Month FOMCThe scope of the meeting, its insistence on 7Month FOMCThe judgment also dispels part of the market because some Fed officials’ hawkish statements have triggered QEConcerns that the reduction may come sooner, it is not difficult to understand the market’s positive response.At the same time, Powell still maintains his judgment that employment is expected to continue to repair and there is a temporary component of high inflation, which is also the basis of his monetary policy view.

THATWhen is the weight reduction? 12Month is still the benchmark situation, whether to postpone the announcement to see the recent data

Based on Powell’s speech yesterday, in terms of future monetary policy, we can basically draw the following judgments:

1）The risk of premature reduction is basically eliminated.There are currently three meetings in September, November, and December before the end of the year. When the volume reduction started in December, the majority consensus in the market, and the volume reduction started from September to November was obviously beyond expectations. However, because Powell said that it is appropriate to reduce the amount during the year, but the risk of the Delta mutant virus needs to be evaluated based on future data, and some temporary factors of inflation and the contradiction between supply and demand are alleviating.So we expect the reduction to arrive early9~11The possibility of the month can basically be ruled out.

2）12Monthly reduction is still a high probability point.The time point for the official reduction is still anchored at the December FOMC meeting. The reason is that on the one hand, the repair of the job market will basically meet the threshold (similar to the 64% repair threshold in the 2013 reduction), and the second is variation. The disturbance of the virus may also be more concentrated in the recent one or two months, rather than continuous and reversible, especially with the recent increase in deaths and hospitalizations, as well as the re-acceleration of intensified injections and vaccination. Taking a step back, even if the start time of the reduction is postponed to the meeting in January next year, there is not much time difference.

3）It implies that the time will not be ruled out, depending on the progress of the next few data.At present, whether the September meeting will imply that there are variables in the reduction. If the impact and impact of the Delta mutant virus is larger and longer than we expected, which will cause the next month’s data such as non-agricultural and other data to be significantly weaker than expected, then the Fed It is not ruled out that it will be postponed to the November FOMC meeting in terms of hints and announcements of the reduction.

4）Compared with the statements of Fed officials, Chairman Powell’s views are more important.Before this meeting, the hawkish statements of some Fed officials (such as the start of the reduction in September) once caused a major disturbance in market sentiment, but facts have proved that compared with some members or local Feds who have no voting rights this year and next Officials’ statements, Powell’s views and opinions are obviously more important, so their reference significance may not be very strong. If Powell is really under the pressure of strong internal hawks to start reducing volume in September, then it is impossible not to use this meeting as a window to send signals and air to the market.

Time points and events in the future? From the perspective of asset prices, 9The end of the month is still an important time

According to the rules we combed in (“Eight Questions and Eight Answers on QE Reduction”) and “QE Reduction History and Enlightenment” reports,From the perspective of asset price impact, the expectation stage is far more important than actual operation. Especially for U.S. Treasury interest rates, the expectation stage tends to rise but actually peaks and falls during actual execution, and changes in U.S. bond interest rates will affect other assets. A series of chain reactions, Not to mention that even if the QE reduction is actually implemented, it is only a reduction in the increase in liquidity rather than an absolute decrease. Therefore, in this sense,9Month FOMCMeeting (9Month 21~22Japan) before and after the suggestion that whether the expected reduction in volume is upgraded may bring about a greater impact on asset prices。

In addition to monetary policy, the end of September is also a key stage where some current fiscal policies ($550 billion in infrastructure, $3.5 trillion in budget expenditures and debt ceilings) may progress. According to our article in “How far is the United States from a new round of infrastructure and stimulus? 》, in the fastest scenario, the House of Representatives has voted to end the repair early on August 25. The budget of 3.5 trillion US dollars can be used to advance through the budget mediation process. After the Senate adjournment ends on September 15, 3.5 trillion can be jointly promoted. Details of the U.S. dollar legislation. The budget adjustment process will be used to advance the legislation after October 1.If there are also positive developments in fiscal policy by then, superimposing the Fed’s implied reductions will provide more support for U.S. bond interest rates and the U.S. dollar.Of course, whether to promote tax increases at the same time also deserves close attention.

In addition, short-term Delta mutant virus and vaccination progress, August non-agricultural and CPI data are also important observation indicators, which will also have an impact on changes in reduction expectations.

From the perspective of asset prices, Powell’s statement is expected to alleviate the short-term market anxiety caused by the recent hawkish statements of some committee members, which will support the market, especially the performance of growth stocks, but it does not mean QE.The reduction will not come, and our judgment on the interest rate of U.S. debt is still possible to go up first and then go down., The catalyst comes from the Fed’s suggestion of reduction, and the fundamentals are that US growth is not as bad as the market fears.

For more analysis of the impact of QE reduction on asset impact paths, interest rate trends, styles, and capital flows, please refer to our recently published special report“Eight Questions and Eight Answers about QE Reduction”。

Author of this article: Liu Gang et al. Source: CICC, original title “CICC | Overseas: Has the Jackson Hole Conference Changed the Decrease Rhythm?” 》

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