Prospect of Powell's "play" at the Jackson Hole Annual Conference: Facing communication challenges, it is expected that there will be no hint of reducing the timetable for debt purchases

Analysts said that Fed Chairman Powell GMT+8 will deliver a highly anticipated speech at the Jackson Hole Economic Conference on Friday (August 26), and may not provide anything about when the Fed will begin to scale back its large-scale asset purchase plan. New hints.

But Powell may have to deal with a sensitive task, which is to explain why reducing the $120 billion in monthly Treasury bonds and mortgage-backed securities (MBS) purchases does not imply an imminent interest rate hike, thereby assisting Fed policymakers in their efforts to prevent transactions. They pushed up the cost of borrowing beyond what the Fed deems necessary or healthy for the economy. Millions of people are still unemployed in the United States.

Yale University School of Management Professor Steve Kelly said, "He will try to show that these are independent decisions... One decision does not necessarily lead to an acceleration of another decision. This kind of communication around reducing debt purchases and raising interest rates... is the greatest challenge."

Fed officials also agree with this.

The minutes of the Fed’s policy meeting on July 27-28 show that many people believe that it is important to emphasize that there is no “mechanical link” between reducing debt purchases and raising interest rates.

It is not easy to deny this connection. Many Fed officials also believe that it would be better to end the bond purchase plan before raising interest rates. Moreover, they are still arguing whether to rapidly reduce debt purchases or continue the current debt purchases, perhaps for as long as eight months.

In addition, some policy makers believe that debt-purchasing measures are not very helpful anyway, because their purpose is to boost demand, but they cannot solve the bottleneck problem faced by enterprises, because they can hardly meet this demand when the economy restarts quickly.

The Jackson Hole Central Bank Annual Meeting was held online for the second year in a row. Because of the many variables, Powell’s speech is unlikely to satisfy investors who are eager to reduce the timetable.

Especially now that the Delta virus is raging, the recovery in the United States has shown signs of slowing down, especially in the most severely affected areas. The Fed seemed to reach an internal consensus at its meeting last month that it will begin to withdraw its special support for the economy later this year, but the data has raised new questions.

Even Dallas Fed President Kaplan, who most supports early debt reduction, said last week that he is paying close attention to the impact of the Delta variant virus, and he will remain open until next month's policy meeting.

Commenting on Powell’s upcoming speech, Jefferies analyst Aneta Markowska said, “Given the current public health crisis, it’s hard to imagine the Federal Reserve committing to a clear timetable for reductions.”

Powell will give an online speech at 22:00 GMT+8 Friday. Markowska and other analysts say Powell may admit that the economy is moving towards full employment. However, he will open the door to the possibility of reductions starting in November. Goldman Sachs analysts said in a report this week that he would be "very cautious" about locking in such a timetable.

Complex signal

A survey of economic analysts shows that the United States is expected to add 725,000 jobs this month after adding nearly 1.9 million jobs in June and July. For several months, the inflation rate has been higher than the Fed’s 2% target, but most Fed policy officials expect inflation to ease later this year. And shortly before Powell's speech on Friday, a series of latest inflation data will be released.

The data message has led many Fed policymakers to believe that the economy is close to making "further substantial progress" towards full employment and 2% inflation, that is, the standards they have set for agreeing to reduce monthly asset purchases.



However, in order to maintain long-term low interest rates and help the economy that is still recovering after the impact of the epidemic, Powell will also emphasize that even if the threshold for reducing stimulus is reached, it is still far from meeting the three conditions for raising interest rates. The threshold for raising interest rates includes the actual achievement of full employment and the expected inflation to rise to slightly above 2% for a period of time.

Tim Duy, chief U.S. analyst at SGH Macro Advisors, said, "This is a very complicated communication. The reality is that cutting stimulus and raising interest rates are inseparable: once the cut starts, it is equivalent to the start of the countdown to raising interest rates."

But it was this premature reaction that Powell wanted to prevent. In 2013, the then Fed Chairman Ben Bernanke tried to smoothly predict the imminent reduction in debt purchases, but the response was that traders pushed up long-term interest rates significantly, and the Fed finally had to postpone the cut in debt purchases.

At this kind of policy turning point, the market usually evaluates the Fed's communication performance the worst. If the same situation repeats itself, it may be a very unfavorable time for Powell, because Biden is evaluating whether to nominate Powell for another four years.

Transcript of the Fed’s communication:



Although the score on Wall Street is getting lower and lower, the Fed led by Powell is clearly on the path of reduction, even if his speech this week is expected to give little information on the actual time point.

Even Mary Daly, chairman of the dovish Federal Reserve Bank of San Francisco, said last week that she is confident that the US economy will reach the threshold set by the Federal Reserve to cut stimulus by the end of the year.

In an online interview with Barron's Roundtable, Daley said, "The key message is that it is time to seriously consider lowering the level of support we provide to the economy, because the economy has indeed gained a foothold." But she also has a strong view on the impact of the Delta variant virus. Open attitude", the time for the cut may be postponed to next year.

Prospective market reaction

Colin Asher, a senior economist at Mizuho Bank, said, “The last time the foreign exchange market experienced significant volatility was after the FOMC meeting in June. Suddenly, the new Federal Reserve looks very similar to the original Federal Reserve, and they will be the first to appear in inflation. Time to raise interest rates."

He pointed out that strong global economic growth indicates that the dollar will weaken, but the Fed's position will be the key. "I am in the camp where the new Fed is the new Fed, but if it is still the old Fed, it is a not very benign background, and the US dollar will maintain reasonable support."

Edward Moya, senior market analyst at OANDA, pointed out that “some investors want some protection to prevent hawkish surprises at the Jackson Hole meeting . Gold prices may consolidate in the downside before the seminar.”

ANZ Bank’s research department said in the report, “For gold, any sign that indicates that they may be more patient in the ongoing epidemic should see that the price is well supported. However, any increase in the real yield is possible. Curb investor demand."

Hareesh V., Director of Commodity Research at Geojit Financial Services, said, “The price of gold will be revised several times.” The new crown epidemic is not as severe as last year, and the demand for hedging may be lackluster in the short term, and investors will pay attention to more risky assets.

(Spot gold daily chart)

GMT+8 20:06, spot gold is now quoted at US$1,787.66 per ounce.