The Federal Reserve Sets the Pace: The world's central bank prepares to taper
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UNLOCK OFFERThe Federal Reserve is preparing markets for the long-awaited reduction and end of its vast program of bond purchases. Recent comments from several Fed officials have been surprisingly aggressive, though markets appear to be waiting on word from Chair Jerome Powell. Inflation may have replaced unemployment in the Fed's book of worries but are there other concerns that could block policy normalization? What of the dollar and Treasury rates? Join senior analysts Valeria Bednarik, Yohay Elam and Joseph Trevisani for an understanding of the parameters of Fed policy.
Joseph Trevisani: The Fed seems to be readying the ground for a bond taper, yet markets have not responded. Are we overstating the possibility?
Valeria Bednarik: Guess we need to hear it from Powell himself.
Yohay Elam: I think the Fed has learned from 2013 by sprinkling hints very gradually, avoiding a tantrum
Joseph Trevisani: Exactly, but Val may be right. The big chief has the market pulse.
Yohay Elam: First it was Kaplan, a lone hawk, and it has gradually moved to Fed Governors
Yohay Elam: Will Powell signal tapering already in Jackson Hole?
Joseph Trevisani: Clarida was quite emphatic. He said he could "certainly" see an announcement on a taper "later this year."
Those statements are not personal coincidence.
Yohay Elam: An announcement is not tapering, I think tapering will be announced in December and begin in 2022
Valeria Bednarik: I know you hope so, but I don't think he will. He may slowly start paving the wave, but he had made it clear multiple times that he will pre-announce it well ahead of time.
Yohay Elam: Well in advance means two meetings. Pre-announcement in September, announcement in December
Valeria Bednarik: That short you say? I really wish so.
Joseph Trevisani: From a market perspective, pre-announce is an announcement. Will the Treasury market run with it?
Valeria Bednarik: They can, but my take is that it won't be worrisome.
The 10-year yield is at 1.20%! We saw the market reacting when it crossed 1.70%.
Joseph Trevisani: So far the Treasury market has been reluctant to move. Exactly, once burned twice shy
Valeria Bednarik: Tapering or announcements about tapering are already priced in.
Joseph Trevisani: The peculiarity is that as longer-term Treasury yields have fallen, the dollar has not.
Yohay Elam: The market seems taper ready. By discussing it, even though denying it will happen immediately, the Fed is preparing markets. Yields show markets are skeptical about inflation. Or certain the Fed will provide support in case markets tumble. About inflation could be in the process of peaking. Core PCE missed estimates. The Prices Paid component of the ISM Manufacturing PMI dropped
Valeria Bednarik: Yeah, but maybe it's not longer just about heating inflation.
Yohay Elam: But a growth slowdown?
Joseph Trevisani: But prices paid was higher in services, so the inflation direction is undecided.
Valeria Bednarik: I think growth in a plateau rather than slowing.
Joseph Trevisani: Powell has said he doesn't think Delta will impact growth, but Fed policy belies that.
Yohay Elam: Indeed, that's why I said I'm the process of peaking, CPI will give its verdict on inflation.
Joseph Trevisani: The gains in core PCE have moderated from 1.3% to 0.3% to 0.1%, so I think the case for peaking is good.
Yohay Elam: I think Delta is already slowing growth, but I agree with the Fed that each wave has diminishing returns, a diminishing impact.
Joseph Trevisani: From a policy perspective a long period at 3% or higher is not terrible, or a problem for the Fed, from a political point of view, for next year's elections the outlook is different. I believe Powell's term is up in February.
Yohay Elam: Powell described transitory inflation as a one-off shock that lifts prices but doesn't turn into persistently high inflation. Or, for example, one year with 4% and then a return to 2% in the following year and the one after.
Joseph Trevisani: Transitory does depend on your definition.
Valeria Bednarik: Yeah, the thing is we don't know if after reaching that 4% it would be able to return to 2% a year later. Clarida was a bit clearer on a possible timeline.
Yohay Elam: Exactly, Clarida talked about a rise to 3% that sticks.
Valeria Bednarik: But well, he was also cautious.
Joseph Trevisani: Forecasts about inflation, whether the Fed's or otherwise, do not have a good record. Given the changes over the past 18 months, I have small confidence in predicting out two years and more.
Yohay Elam: The Fed´s inflation predictions overshot inflation for years.
Joseph Trevisani: The reluctance of people to return to work may be more than just extended unemployment benefits. Perhaps the new distributed economy permits far more people to work without documentation? I think there may be changes happening that are not registering in official data.
Yohay Elam: For the labor market, September is key:
- Federal unemployment benefits lapse.
- Kids go back to school.
We will then receive some answers to the puzzling situation of many available jobs and many unemployed. Understand if it was due to these factors or longer-term changes.
Joseph Trevisani: Agreed on September, but the report is two months away.
Yohay Elam: Yeah, which leads me to the conclusion that inflation is now more critical to traders than employment.
Valeria Bednarik: so guess we will need to save our excitement for next month.
Yohay Elam: Don´t get me wrong, the NFP will be choppy, but inflaiton will likely have a larger longer-term impact.
Valeria Bednarik: I agree with you on that.
Joseph Trevisani: I agree as well, I think the long decline in inflation is over. There may be a pullback in globalization as well.
Yohay Elam: Deglobalization – a mouthful of a word – is indeed a term we'll be using more and more in the next few years, in the short term, NFP guesses?
Joseph Trevisani: A number of states have ended extended unemployment benefits so I am going to be optimistic. 1.1 million.
Valeria Bednarik: I hardly believe we will be talking about deglobalization in a year. The world is anxious to return to "normal". And about NFP good, but not that good, maybe 500/600K.
Yohay Elam: I don't think unemployment benefits have that much of an impact, but the jumps in the Employment components of both ISM PMIs makes me optimistic. I'll go for one million. If Val is right and we are both wrong, will it weigh on the dollar or boost it on safe-haven flows?
Valeria Bednarik: They do have... believe me.
Joseph Trevisani: Dollar negative if Val is right. Safety flows no, at least not for NFP, but possible if lockdowns resume.
Yohay Elam: Yeah, I agree, if Val is optimistic and the outcome is closer to ADP's 330K, then I would opt for a risk-off, dollar-positive response. But 500-600K is just normal weakness, not an alarming one.
Joseph Trevisani: ADP's correlation to NFP size is poor, and has been particularly so in the pandemic, still, it is the only actual data point. ISM is a sentiment indicator.
Yohay Elam: Yeah, those leading indicators just cause confusion.
Joseph Trevisani: The disparity between unemployed and the JOLTS survey is unexpected and unexplained, I wonder if it is topical or points to deeper changes in the economy?
Valeria Bednarik: JOLTS is always old news, it is reported with a two-month delay right?
Joseph Trevisani: Yes, it is tardy.
Yohay Elam: I think that high job openings and many unemployed is a result of the quick reopening – transitory. It should significantly ease in the autumn.
Joseph Trevisani: The jobs are primarily in the lower paid service sector, for whom unemployment is a reasonable substitute, anecdotally, I see help wanted signs everywhere.
Yohay Elam: Regarding inflation, we are still in a globalized world and China may export lower inflation in coming months. They are cracking down on rapidly growing tech companies in order to exert more control. And, they have a few new covid cases, to which they are responding harshly. That could dampen growth and inflation.
Joseph Trevisani: China's crackdown on tech companies is political, information control.
Valeria Bednarik: I'm not sure how much China would influence. Indeed, we are still in a globalized world, but worth is uneven, and it's not only depending on one or other economy's progress.
Joseph Trevisani: China's behavior may make companies reluctant to invest there but there are many other welcoming overseas destinations. The long-term impact of the pandemic on international manufacturing is uncertain, there are credible arguments on both sides.
Yohay Elam: Regarding the dollar, I think the world is divided into central banks running ahead of the Fed, such as the RBA and the RBNZ, and those lagging behind, the ECB and the BOE.
Valeria Bednarik: Maybe that's why we are so eagerly waiting for clear hints of tapering. However, not sure if the RBA is ahead of the Fed. They have drawn a timeline, but we are talking about 2024. and as months go by, Australian policymakers are losing optimism. They may be ahead in monetary policies, but way behind in economic recovery. They are just now suffering what the world suffered a year ago. And it seems it will keep worsening.
Yohay Elam: Yeah, maybe the RBNZ is the sole central bank ahead of the Fed.
Joseph Trevisani: The Fed will set the standard on tapering. Since it is spending far more than anyone else, it makes sense for the others to wait. After all, it is administering the global currency.
Yohay Elam: As one US policymaker said some 50 years ago: "The dollar is our currency but your problem".
Valeria Bednarik: Yeah, it could be a problem, but what would we were doing in a stable, ordered world?
Yohay Elam: Traders need action, which includes problems, for volatility.
Valeria Bednarik: Getting bored, that's it. Exactly!
Joseph Trevisani: Well...the pandemic certainly delivered volatility.
The Federal Reserve is preparing markets for the long-awaited reduction and end of its vast program of bond purchases. Recent comments from several Fed officials have been surprisingly aggressive, though markets appear to be waiting on word from Chair Jerome Powell. Inflation may have replaced unemployment in the Fed's book of worries but are there other concerns that could block policy normalization? What of the dollar and Treasury rates? Join senior analysts Valeria Bednarik, Yohay Elam and Joseph Trevisani for an understanding of the parameters of Fed policy.
Joseph Trevisani: The Fed seems to be readying the ground for a bond taper, yet markets have not responded. Are we overstating the possibility?
Valeria Bednarik: Guess we need to hear it from Powell himself.
Yohay Elam: I think the Fed has learned from 2013 by sprinkling hints very gradually, avoiding a tantrum
Joseph Trevisani: Exactly, but Val may be right. The big chief has the market pulse.
Yohay Elam: First it was Kaplan, a lone hawk, and it has gradually moved to Fed Governors
Yohay Elam: Will Powell signal tapering already in Jackson Hole?
Joseph Trevisani: Clarida was quite emphatic. He said he could "certainly" see an announcement on a taper "later this year."
Those statements are not personal coincidence.
Yohay Elam: An announcement is not tapering, I think tapering will be announced in December and begin in 2022
Valeria Bednarik: I know you hope so, but I don't think he will. He may slowly start paving the wave, but he had made it clear multiple times that he will pre-announce it well ahead of time.
Yohay Elam: Well in advance means two meetings. Pre-announcement in September, announcement in December
Valeria Bednarik: That short you say? I really wish so.
Joseph Trevisani: From a market perspective, pre-announce is an announcement. Will the Treasury market run with it?
Valeria Bednarik: They can, but my take is that it won't be worrisome.
The 10-year yield is at 1.20%! We saw the market reacting when it crossed 1.70%.
Joseph Trevisani: So far the Treasury market has been reluctant to move. Exactly, once burned twice shy
Valeria Bednarik: Tapering or announcements about tapering are already priced in.
Joseph Trevisani: The peculiarity is that as longer-term Treasury yields have fallen, the dollar has not.
Yohay Elam: The market seems taper ready. By discussing it, even though denying it will happen immediately, the Fed is preparing markets. Yields show markets are skeptical about inflation. Or certain the Fed will provide support in case markets tumble. About inflation could be in the process of peaking. Core PCE missed estimates. The Prices Paid component of the ISM Manufacturing PMI dropped
Valeria Bednarik: Yeah, but maybe it's not longer just about heating inflation.
Yohay Elam: But a growth slowdown?
Joseph Trevisani: But prices paid was higher in services, so the inflation direction is undecided.
Valeria Bednarik: I think growth in a plateau rather than slowing.
Joseph Trevisani: Powell has said he doesn't think Delta will impact growth, but Fed policy belies that.
Yohay Elam: Indeed, that's why I said I'm the process of peaking, CPI will give its verdict on inflation.
Joseph Trevisani: The gains in core PCE have moderated from 1.3% to 0.3% to 0.1%, so I think the case for peaking is good.
Yohay Elam: I think Delta is already slowing growth, but I agree with the Fed that each wave has diminishing returns, a diminishing impact.
Joseph Trevisani: From a policy perspective a long period at 3% or higher is not terrible, or a problem for the Fed, from a political point of view, for next year's elections the outlook is different. I believe Powell's term is up in February.
Yohay Elam: Powell described transitory inflation as a one-off shock that lifts prices but doesn't turn into persistently high inflation. Or, for example, one year with 4% and then a return to 2% in the following year and the one after.
Joseph Trevisani: Transitory does depend on your definition.
Valeria Bednarik: Yeah, the thing is we don't know if after reaching that 4% it would be able to return to 2% a year later. Clarida was a bit clearer on a possible timeline.
Yohay Elam: Exactly, Clarida talked about a rise to 3% that sticks.
Valeria Bednarik: But well, he was also cautious.
Joseph Trevisani: Forecasts about inflation, whether the Fed's or otherwise, do not have a good record. Given the changes over the past 18 months, I have small confidence in predicting out two years and more.
Yohay Elam: The Fed´s inflation predictions overshot inflation for years.
Joseph Trevisani: The reluctance of people to return to work may be more than just extended unemployment benefits. Perhaps the new distributed economy permits far more people to work without documentation? I think there may be changes happening that are not registering in official data.
Yohay Elam: For the labor market, September is key:
- Federal unemployment benefits lapse.
- Kids go back to school.
We will then receive some answers to the puzzling situation of many available jobs and many unemployed. Understand if it was due to these factors or longer-term changes.
Joseph Trevisani: Agreed on September, but the report is two months away.
Yohay Elam: Yeah, which leads me to the conclusion that inflation is now more critical to traders than employment.
Valeria Bednarik: so guess we will need to save our excitement for next month.
Yohay Elam: Don´t get me wrong, the NFP will be choppy, but inflaiton will likely have a larger longer-term impact.
Valeria Bednarik: I agree with you on that.
Joseph Trevisani: I agree as well, I think the long decline in inflation is over. There may be a pullback in globalization as well.
Yohay Elam: Deglobalization – a mouthful of a word – is indeed a term we'll be using more and more in the next few years, in the short term, NFP guesses?
Joseph Trevisani: A number of states have ended extended unemployment benefits so I am going to be optimistic. 1.1 million.
Valeria Bednarik: I hardly believe we will be talking about deglobalization in a year. The world is anxious to return to "normal". And about NFP good, but not that good, maybe 500/600K.
Yohay Elam: I don't think unemployment benefits have that much of an impact, but the jumps in the Employment components of both ISM PMIs makes me optimistic. I'll go for one million. If Val is right and we are both wrong, will it weigh on the dollar or boost it on safe-haven flows?
Valeria Bednarik: They do have... believe me.
Joseph Trevisani: Dollar negative if Val is right. Safety flows no, at least not for NFP, but possible if lockdowns resume.
Yohay Elam: Yeah, I agree, if Val is optimistic and the outcome is closer to ADP's 330K, then I would opt for a risk-off, dollar-positive response. But 500-600K is just normal weakness, not an alarming one.
Joseph Trevisani: ADP's correlation to NFP size is poor, and has been particularly so in the pandemic, still, it is the only actual data point. ISM is a sentiment indicator.
Yohay Elam: Yeah, those leading indicators just cause confusion.
Joseph Trevisani: The disparity between unemployed and the JOLTS survey is unexpected and unexplained, I wonder if it is topical or points to deeper changes in the economy?
Valeria Bednarik: JOLTS is always old news, it is reported with a two-month delay right?
Joseph Trevisani: Yes, it is tardy.
Yohay Elam: I think that high job openings and many unemployed is a result of the quick reopening – transitory. It should significantly ease in the autumn.
Joseph Trevisani: The jobs are primarily in the lower paid service sector, for whom unemployment is a reasonable substitute, anecdotally, I see help wanted signs everywhere.
Yohay Elam: Regarding inflation, we are still in a globalized world and China may export lower inflation in coming months. They are cracking down on rapidly growing tech companies in order to exert more control. And, they have a few new covid cases, to which they are responding harshly. That could dampen growth and inflation.
Joseph Trevisani: China's crackdown on tech companies is political, information control.
Valeria Bednarik: I'm not sure how much China would influence. Indeed, we are still in a globalized world, but worth is uneven, and it's not only depending on one or other economy's progress.
Joseph Trevisani: China's behavior may make companies reluctant to invest there but there are many other welcoming overseas destinations. The long-term impact of the pandemic on international manufacturing is uncertain, there are credible arguments on both sides.
Yohay Elam: Regarding the dollar, I think the world is divided into central banks running ahead of the Fed, such as the RBA and the RBNZ, and those lagging behind, the ECB and the BOE.
Valeria Bednarik: Maybe that's why we are so eagerly waiting for clear hints of tapering. However, not sure if the RBA is ahead of the Fed. They have drawn a timeline, but we are talking about 2024. and as months go by, Australian policymakers are losing optimism. They may be ahead in monetary policies, but way behind in economic recovery. They are just now suffering what the world suffered a year ago. And it seems it will keep worsening.
Yohay Elam: Yeah, maybe the RBNZ is the sole central bank ahead of the Fed.
Joseph Trevisani: The Fed will set the standard on tapering. Since it is spending far more than anyone else, it makes sense for the others to wait. After all, it is administering the global currency.
Yohay Elam: As one US policymaker said some 50 years ago: "The dollar is our currency but your problem".
Valeria Bednarik: Yeah, it could be a problem, but what would we were doing in a stable, ordered world?
Yohay Elam: Traders need action, which includes problems, for volatility.
Valeria Bednarik: Getting bored, that's it. Exactly!
Joseph Trevisani: Well...the pandemic certainly delivered volatility.
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