Financial Blog

Last Friday, August 28, Federal Reserve (Fed) Chairman Jerome Powell virtually delivered his yearly Jackson Hole speech to Central Bankers globally. Anticipation was high for this year’s event as markets have been waiting on the Fed’s guidance as to when they would start pulling back on their unprecedented easing policies to combat the ongoing pandemic. There were mixed views as to the matter at hand but the consensus was that the Fed would start early — as echoed by several Fed officials before the event. The Fed was treading a very thin line as an early taper could be detrimental to growth but a late one would rather push inflation out of control.

Key takeaways from the event

We are all systems go

As expected and as also published during their last Fed minutes, it is evident that taper would push through this year. The announcement was widely expected as recent strong economic numbers entail that the market is at all systems go when it comes to reducing asset purchases this year.

The glass is half-empty approach

Fed Chairman Powell is looking at the glass half empty when it comes to the labor market — Powell points out employment numbers are still 6 million below February 2020 levels. Several sectors remain depressed, particularly in the service sector.

Inflation remains transitory

Much to the market Hawks dismay — who contends that US 10 Year (US10Y) will rise to 1.60-, 1.80% handles by the end of 2021 — Fed Chair Powell continues to stick to his transitory stance on inflation. Supply-chain disruptions amid the COVID-19 delta surge are seen to temporarily drive prices higher. Fed Chair Powell directly said it would be a big mistake for the Fed to respond to momentary fluctuations in the market.

Tapering does not translate to earlier rate hikes.

One of the biggest storylines Fed Chair Powell focused on is that the rate hike timing remains and the target for lift-off will not be pushed back despite starting asset purchase reduction this year. The Fed remains steadfast to keep accommodative rates as needed to restore the labor force.

Dovish Cheers

The speech overall was viewed as a dovish approach to tapering. Initial reactions were very positive with US markets hitting all-time highs while US10Y, which before the event was looking to breach 1.40% gapped below 1.30% (currently at 1.27% at the time of writing). Local bonds also joined in the party as PHP Government Securities moved lower by 8-15 bps after the speech. Local bonds have seen supply pressures heading to the event as spreads have significantly widened with the 7–11-year tenors widening by 30-60 bps. The dovish tone by the Fed along with the BSP’s similar dovish stance could provide some relief for local markets.

The Fed has the luxury of time

Despite the thin line that the Fed is walking with regards to an early or late taper, time is on their side nevertheless. Recent developments with regards to the spike due to the COVID-19 Delta variant globally give the Fed more time to assess the economic landscape. Telltale signs of a stalling growth can already be seen, albeit US GDP numbers were strong on a QoQ basis at 6.6%, as it did fall short of market expectations of 6.7%. Moreover, CPI could have potentially reached its peak as US
YoY CPI last August was flat from the previous month at 5.4%.

US economic numbers will still be volatile as the current situation remains uncertain. The rising number of COVID-19 cases in the US has reached January 2021 levels with the latest figure at 280,403 new cases as of August 30, 2021. These factors, as reiterated by Fed Chair Powell, are still uncertain when it comes to the overall effect on the economy but it’s something that he is keeping a close eye on. Bottom line, he remains patient when it comes to the actions he would take, and based on how US bonds have moved post-Jackson Hole symposium, the US bond market is patiently waiting with him.