When Jerome Powell takes the stage Friday at the Federal Reserve’s annual economic symposium, which this year is almost but traditionally held near Jackson Hole, Wyo, the Federal Reserve chairman will likely deliver a speech to be held in the US. much has been revised over time. past two months.
Many market participants expect the Fed chairman to announce a date and pace for phasing out its $120 billion a month in bond purchases. But the dominance of the Delta variant of COVID-19 makes such a statement less certain, some economists say.
Some crypto analysts see downsizing as a obstacle for bitcoin speculation because it is generally believed that quantitative easing (QE) gives investors the liquidity to invest more in riskier assets. Due to the macroeconomic uncertainty created by the course of the pandemic, bitcoiners may continue to count on quantitative easing that remains at the same pace or tapers off at a slower pace than could have been expected a few months ago, when coronavirus-related restrictions appeared . the end was approaching and vaccines were more widely distributed.
“I expected he might announce plans to phase out, but the increase in the Delta variant makes it less likely,” said Powell’s David Beckworth, a former international economist at the US Treasury Department.
“We are sure there is more caution, but the economy is still growing rapidly. Inflation is high,” said Beckworth, now a senior fellow at the Mercatus Center at George Mason University. “I think you can argue why they might still be going ahead and phasing out.”
“Had this been maybe two months ago, I would have said with more confidence that he would state something concrete than the committee has,” said Steven Kelly, a research associate with the Yale Financial Stability Program. “I assume he has torn up a few drafts in the intervening weeks, given the state of the Delta virus and the fact that the conference itself has gone online due to disruptions.”
It is possible that Powell is concerned with the issue of stablecoins – digital tokens pegged to government-issued currencies such as the US dollar – and financial stability because that issue came up in last month’s Fed minutes of the meeting. But given the importance of monetary policy at Jackson Hole, crypto is unlikely to come out in the speech, Beckworth said.
Powell is also likely to assess what the central bank has learned so far with the implementation of its flexible medium inflation targeting framework. The framework came at a good time as it allowed the Fed to react to the inflation misses of 2020, but the past year has also made it more difficult to assess the success of the framework, as most of the high inflation is supply inflation and not inflation. on all awards, Beckworth added.
In the minutes of last month’s Fed meeting, central bank officials expressed interest in decoupling quantitative easing from interest rates, which would give the Fed more flexibility to maneuver without a “tapered tantrum,in which market expectations for Fed fund rates are moving up as investors expect rate hikes to follow, Kelly said.
‘Passive’ or persistent?
Since most inflation has been caused by supply chain bottlenecks, the Fed will not feel much pressure to taper in response to inflation headlines. Powell has characterized the high inflation as “transient.”
“There’s a reason they make these purchases in the billions and trillions [of dollars] because it takes so much of it to make an impact,” Kelly said. “Even with hundreds of billions of dollars of QE we’re talking about, maybe a 100 basis point impact – if you’re lucky – on the 10-year [Treasury bond] yield.”
General inflation is moderate, said Stanford economist Erik Brynjolfsson. “The real 10-year return is 1% negative,” he said. That is the nominal yield on the US Treasury bond, minus inflation.
“That tells us that people are willing to lend money to the US government at negative real interest rates, so there’s no real evidence that the economy is overheating by that measure,” Brynjolfsson said.
With the $1 trillion infrastructure bill making its way through Congress, pressure on the Fed to maintain economic growth may be eased, Brynjolfsson added.
“When the government spends money, it makes a huge difference whether it’s spent on investments such as infrastructure, or on current consumption, such as payments to individuals,” Brynjolfsson said. “If it is spent on investment, that means productivity will grow, capacity will grow and inflation will fall. If it is spent on consumption, then you have no more supply and no more output.”
At this point, it’s not known when lower unemployment will lead to more headline inflation, and the Fed, policymakers and Congress will want to test how far they can push the economy, Brynjolfsson said.
“The Fed has missed most of the last ten years by getting unemployment benefits” [rate] higher than what their target was, and also with inflation below what their target was,” he said. “Both point in the same direction that the Fed has been too tight.”