On Friday (Aug 27) Federal Reserve Chairman Jerome Powell gave a long anticipated, heavily previewed, speech to the Jackson Hole Economic Policy Symposium. He was upbeat on his view of economic recovery, while downplaying inflation worries. Powell spent a good deal of his speech explaining why he thinks the forces driving up inflation in recent months are transitory, arguing inflation expectations are well-contained, wage pressures are absent, and most of the run-up in prices we have seen is associated with reopening and will recede over time.
Market participants were relieved by Powell’s comments, interpreting them as an indication that the central bank isn't in a rush to begin curtailing its stimulus efforts even as it still anticipates beginning tapering the $120 billion worth of bond buying by year-end, and markets rallied sending the S&P 500 index above 4,500 for the first time.
Why it matters: Over longer periods of time, stock prices and GDP have generally moved in the same direction as they are exposed to the same overarching trends. However, over shorter periods of time, they’ll sometimes move in different directions. The Fed is signaling that it expects to soon announce plans to taper quantitative easing (QE), an emergency monetary policy program designed to keep interest rates low and bond markets very liquid.
This tapering could introduce problems into the economy if the beneficiaries of the stimulus aren’t ready to see it go.
However, if market participants are prepared, market volatility related to the announcement could be limited.
What to watch: The next U.S. jobs report will be released today. If the number is strong, we could hear the Fed announce the initiation of tapering before the end of the year.
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