Home » Jackson Hole, Powell’s Fed hostage to the Delta variant. From the ECB a clarification that takes away the sleep of doves

Jackson Hole, Powell’s Fed hostage to the Delta variant. From the ECB a clarification that takes away the sleep of doves

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Fed and ECB, the hawks are increasingly besieging Jerome Powell and Christine Lagarde? The impression is this, on the day when the number one of the Federal Reserve Jerome Powell will finally take the floor, on the occasion of the Jackson Hole symposium, long awaited by the markets. And in which perhaps, finally, investors will be able to understand when the Fed will start pressing the “tapering” button to reduce the anti-pandemic program of Quantitative easing, which results in the purchase of assets for $ 120 billion a month.

In the last few hours, the indications that have come from the world of the Fed have destroyed the belief that various analysts have disbanded: the belief that Powell & Co will remain accommodating, given the unknowns on the outlook of the US economy (and the world), re-enforced by the new ones. fears about the Covid-19 pandemic. It can be said clearly, and without problems. Deciding to withdraw monetary bazookas of the caliber of the QE launched by the Fed and the ECB and / or to raise interest rates while the run of the Delta variant in the world confirms the unknown factor of the Covid-19 pandemic despite the vaccines, is certainly not easy. Sure, it could be done as did the Bank of Korea, South Korea’s central bank, which deliberately snubbed the Delta variant threat, and yesterday decided to raise interest rates for the first time in nearly three years. But if in the United States we can speak of fears of overheating of the economy, the same cannot be done in the case of the Eurozone. But it is also true that, yesterday, from the GfK survey of consumer confidence in Germany, it emerged that precisely the acceleration of inflation and the increase in Covid-19 cases will curb the desire of Germans to do shopping..

To say stop to monetary stimuli means to take responsibility for having cut aid to the economy prematurely, thus risking crippling the recovery of GDP and causing chaos and disintegration on the markets. That is why some have predicted a slow tapering in any case. So did Edward Moya, senior market analyst at Oanda, for example: “The Fed might make an announcement about tapering in September or November, but tapering will probably go slow, with no commitment to hike rates. interest”. “It is quite difficult for a central banker, who meets his colleagues in a virtual way because of a health risk, to say that the time has come to reduce the accommodative monetary policy, without recognizing that the health risk can affect the economy” agreed Vince Reinhart, Mellon’s chief economist. The opinion of Adam Posen, president of the Peterson Institute for International Economics, is different, according to which tapering will take place: “I think it is likely that it will be launched between now and the end of the year, regardless of the Delta variant”. A decision possible regardless of the Delta variant? Possible for some Fed officials. Yesterday and pending Powell’s speech, some Fed voices made themselves heard, with hawkish messages. Interviewed by Yahoo Finance, Dallas Fed President Robert Kaplan said he was convinced of the resilience of the US economy against the Delta variant. In his opinion, he therefore stressed, a US rate hike in 2022 would be so appropriate. Regarding the tapering of QE, Kaplan pointed out that the purchases of the assets that Jerome Powell’s Federal Reserve is carrying out with its QE program, worth $ 120 billion per month, have done their homework and are now not they are better suited to the situation. Hawkish comments also from Esther George, president of the Kansas Fed who, in an interview with Cnbc, stated that, “given the progress we have seen”, the reduction of the purchasing program “is appropriate”. However, no clarification has come about when tapering should start. But, “looking at the job growth that took place last month and the inflation levels right now, I believe the economy doesn’t need that much (monetary) stimulus – George pointed out – I’d rather speak of tapering more sooner than later “. And Filppo A. Diodovich, IG market strategist, also pointed out to the statements of the president of the FED in St. Louis James Bullard, who “reiterated that the process of reducing monetary stimuli must be started as soon as possible to contain the pressures inflationary. Bullard stated that it is necessary to be particularly careful to control price stability, with a tapering process that should end in his opinion in March 2022 ”.

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Diodovich presented in this context what are IG’s expectations of what Powell will say today: “Our expectations are for nothing. Powell will try to take some more time before announcing the start of the monetary stimulus reduction process. Fears about the spread of the delta variant and the economic problems it could cause in the coming quarters suggest that the Fed chairman could prolong the Fed’s ‘wait and see’ attitude ”. On the other hand, the Fed still has to take stock of the situation well: inflation data will be released today. It is true that the first revision of US GDP for the second quarter was issued yesterday, but the August employment report, scheduled for next September 3, is missing. These data will accompany the “economic outlook on inflation, GDP and unemployment that will be prepared (by the Fed) for the September meeting” and which “will be crucial to understanding the timing and pace of the tapering process”. Diodovich thus writes in a note that “we maintain the view that the announcement of the tapering process will take place in the September meeting starting in November / December 2021”. Nothing from today’s meeting in Jackson Hole also for Paolo Zanghieri, senior economist of Generali Investments, warns investors against the risk of being disappointed: “We believe that those who expect precise communication about the modalities and the timing of tapering on asset purchases, ”said Zanghieri, adding that the next FOMC meeting on 22 September will be the most appropriate opportunity to address the tapering issue, given that the new estimates on the economy will be pitted in the meeting. “Our baseline scenario, assuming the Delta variant remains under control, is for a formal announcement in November, followed by implementation in December,” the economist pointed out.

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And Edoardo Fusco Femiano, market analyst at eToro, pointed out that, “at the end of a week spent following Powell’s intervention, which will take place at approximately 4 pm Italian time, the markets have provided an idea in these sessions rather clear of what they expect: the underlying idea is that the Fed chairman has no interest in generating disordered reactions in the markets. Rather, Jerome Powell is likely to be interested in cautiously preparing investors for an upcoming turnaround in monetary policy. In light of the latest economic data, positive but far from exciting, with the uncertainty of the Delta variant of Covid weighing on the outlook for next autumn, the Fed is likely to send out the message that it wants to remain wait-and-see with respect to the ‘evolution of the economic situation and, consequently, with respect to the change in monetary policy ”.

Yet hawkish statements from the world of the Fed were not lacking. Bullard – known for having already shocked Wall Street and the whole world with his hawkish words – also referred to the US real estate market, in particular the danger of rising house prices. “There is no need to be too complacent – he explained – Some believe that the damage could outweigh the benefits”, continuing to buy mortgage-backed securities: in this way, in fact, mortgages would remain low, and this would be enough to increase speculation on the real estate market, which would see a further increase in prices.

eToro explains: “In terms of market reaction, prices in recent days have priced expectations of a ‘dove’ Fed, which is why, even in the face of a reassuring message, it is not excluded that we may witness an increase in volatility , typical of what a background picture has already been priced in advance. It should also be noted that yesterday the president of the Federal Reserve in St. Louis, James Bullard, said that the central bank “is aligning” en masse with a plan that plans to start reducing the monthly program for the purchase of bonds from 120 billion dollars and also seemed skeptical about a reduction in inflation in 2022, partially contradicting the position of Jerome Powell, who instead has always claimed to see inflation as a transitory phenomenon ”. That said, not even the situation in Europe, in the ECB’s upper echelons of Frankfurt, is simple, if we consider that from the minutes relating to the last meeting of 21-22 July – the one in which it emerged that, “if in the end it will succeed in anchoring inflation expectations to the target, as intended, the new guidance will not necessarily imply ‘lower interest rates for a longer period of time’. (in reference to the new guidance launched by Christine Lagarde with the revolution on the inflation target (equal to 2%). In this situation, watch out for BTPs and more, which in recent days have been affected by important sell offs. In particular, in the the day before yesterday, sales were particularly strong “especially on Eurozone government bonds – according to the note from Mps Capital Services – with rather high volumes considering the summer period. The low volatility of recent months had probably led operators to implement carry-trade strategies and yesterday (the day before yesterday for the reader, referring to August 25), some profit taking may have taken place. There is no precise reason behind the move, but the signs of inflationary pressures coming from the index IFO, together with the words of the ECB member, De Guindos, on a possible upward revision of the growth estimates in September were the triggers that triggered re sales “. In the meantime, Italian rates retraced, after the blaze of the day before yesterday, when they jumped by 9 basis points, bringing back the strongest rise in recent months. In particular, Reuters pointed out that, in Wednesday’s session, the boom in yields on both BTPs and German Bunds was the strongest in nearly six months, due, according to analysts, to a combination of factors, including the investor decision to unload bonds ahead of the Jackson Hole Fed summit and some euro area economic forecasts that have been pitted. Today, 10-year BTP rates are around 0.652%, compared to 0.668% yesterday, against a BTP-Bund spread of 106.8, compared to 0.668% yesterday.

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