Brace For Powell Signaling Taper Is Near, Sparks Dollar Rally

(Bloomberg) — Federal Reserve Chairman Jerome Powell will provide strong indications that the tapering will begin in 2021, with the dollar and stocks rising, if Bloomberg News’ MLIV strategists are right.

The majority believe Powell will present a clear outlook for phasing out quantitative easing when he delivers his Jackson Hole speech on Friday. Some common themes among the MLIV team are that tapering will increase both government bond yields and the currency. The strength of the economy will continue to send the S&P 500 to records.

A winding down would mark the beginning of the end for the Fed’s unprecedented QE program, an emergency measure introduced to help the economy cope with the impact of the coronavirus. A downscaling would theoretically produce higher, more attractive government bond yields, drawing money away from stocks and commodities. Opinion in the analyst community is divided on whether Powell will provide a clearer guide to tapering.

The MLIV team has thought about what will happen in the markets. Here are some of the scenarios they cited:

The Bloomberg Dollar Spot Index is likely to pass its intraday high on August 20. There are plenty of risks that the Fed could refrain from providing any guidance. That could also boost the dollar as investors seek the safety of the US currency. The bear case for equities is that the delta variant will prompt the Fed to delay the winding down. Concerns over a possible economic slowdown will undermine equities The bull scenario is that the Fed could scale back as the economy is now doing well, which will send the S&P 500 to further records. because it’s 2021 and that’s what they’re doing.”

NOTE: This article was compiled by Bloomberg’s Markets Live team. The observations are those of the bloggers and not intended as investment advice. For more market analysis, visit MLIV.

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