Ro'Macro #9: Why the FED will not announce taper during Jackson Hole ?
The Jackson Hole Economic Symposium is an annual reunion, held in Jackson Hole in the Wyoming state since 1981. Participants include central bankers, finance ministers and global financial leaders.
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Let’s get to it! Every year a lot of financial leaders are meeting in Jackson Hole and they are debating around many subjects, but the most expected event is always the speech of the chairman of the FED. Jerome Powell is giving a speech on Friday at 3 p.m (London time).
During the first part of the year, rates rose again, that much that it was worrying most of the finance world. US 10y was flirting with 1.75%, German 10y was almost flat and 10y of France was positive again. Inflation was coming back and we thought, yes this is it, recovery, inflation, rates are raising what the Fed is waiting to change its policy ?! Then the Covid didn’t stop to surprise us with another variant…
A few weeks ago I saw a lot of people saying Jerome Powell will announce something at Jackson hole, and still now a few are expecting something, let’s review why he won’t announce anything. (If I am wrong then you can have a good laugh about me this week-end!)
First, we have to remember what the FED told us for months. The policy is outcome based, and it won’t change the cap on the first thing showing progress. Moreover and I already said that in a previous post, if you read the press release you will see that inflation is coming LAST in the factor of changing policy for the FED.
What is coming first ? Health. What do we have at the moment ? Here’s the chart 2millions more of Covid-19 cases in August, mostly in the form of the Delta variant.
“The variant has continued to grow into a larger percentage of cases reported over the last several months. The main delta strain accounted for 83.4% of cases in the last two weeks of July, an increase from 72% in the two weeks prior.”
- USNEWS 4th of August.
What comes next ? Economic conditions and unemployment. Here’s the chart again, it’s going in the right direction, but there is still a long way to go. Last time the FED made changes because of the job market unemployment rates was below 4% in 2018. About growth, numbers are good, but we cant’t say it’s going out of control !
Unemployment rate:
%MoM Growth:
In the end we have inflation. last month was the second one with 5.4%, which is a lot when we look at it this way, but let’s break it down, because we have to look at inflation that affect daily life, that's where it has the most impact. As you can see in the image below, energy is rising fast, and why ? mostly because the cost of transport that’s at an all time high and Covid still impact production. But what’s really impressive ? 41.7% of inflation on used cars and truck. Is it something that will last ? Not sure about that. Anyway those two things should at least normalize soon.
Inflation:
Inflation breakdown:
Let’s look at what impact us the most, food, we need to eat every day right ? but we can see that food prices are rising 3.4%, which definitely is in the window of overshoot of the FED because as you can see also in the inflation chart, before 2021 and for the past decade, inflation UNDERshoot and was less than 2%, which is below the long term target of the FED.
Now you will say, inflation is fueled by something right ? People goes to restaurant again, they go shopping etc, they CONSUME. Yep, and let’s look at another chart (I know lots of chart today but most of the time they speak better than me…). We can clearly see reopening effects but after that, numbers aren’t that great and last one wasn’t encouraging at all.
I think there is two reasons for that :
1) Obviously Delta variant rising is impacting activity and people might be more conservative about where they go, how much they go out etc.
2) Unemployment benefits are going to stop in September and after that a lot of people who might have received more money than they did while working will need to move their asses (pardon my french!) to find a job and get some money. Meaning, now that they won’t have money coming right in the mailbox without doing anything, they might save a bit while they can.
That’s not all, there is some other factors in play here. (we’re almost done don’t worry!)
First, New-Zealand which handled the pandemic in one of the best way possible, 2600 cases, 26 deaths, a lot of countries would love to have same numbers. Everyone thought they would rise rates during the last meeting, and because of ONE Covid cases they didn’t. They showed 0 tolerance policy regarding the development of Covid and that is a new card that Jerome Powell didn’t knew he had a few days ago.
“Major central banks in the APAC region are in no rush to start hiking policy rates ... with the exception of New Zealand and Korea” CNBC
Now that even the country that are the closest to raise rates don’t do it, with the current situation Jerome Powell can easily lay on that and say that the situation isn’t clear enough at the moment.
The last thing, it is only a speech from Jerome Powell, no dots from all the Fed committee members so this event has not the same weight as a proper FED meeting. Moreover, Jackson Hole symposium is virtual this year, basically Jerome Powell will give the speech from is living room, it’s not the same as if there is all the most powerful financial leaders in the world around you waiting for your speech and asking questions. No pressure.
That’s it for today.
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See you on Friday for the Weekly Selection #4, in the meantime you can read my last post on the Afghan situation or the last Weekly Selection !
Robin
Thanks for the helpful analysis Robin!