Federal Reserve chief Jerome Powell unlikely to rock boat as Covid returns

Fed chief Jerome Powell is unlikely to say anything to rock the boat when he makes his Jackson Hole speech early on Saturday morning Australian time.

US Federal Reserve chairman Jerome Powell. Picture: AFP

Investors have turned cautious ahead of Jerome Powell’s Jackson Hole speech early on Saturday morning Australian time, but the Fed chief is unlikely to say anything to rock the boat at this point.

As much as it’s tempting to buy some portfolio protection simply because the US sharemarket has risen so far and Jackson Hole has been a source of central bank policy signals in the past, Covid has worsened in the US, with daily new cases and deaths rising, the highest number of hospitalisations since January and ICU admissions at a record high, while economic data has mostly been weaker than expected.

As has been the case throughout the pandemic, the last thing the Fed needs now is a market sell-off that tightens financial conditions, particularly as economic growth risk is offsetting inflation risk.

Of course with the market becoming more complacent on the risk of Fed tapering, any tapering signal from Powell would have an outsized impact on risk assets, but why would he do that?

“If there is a lesson from these meetings, it is don’t tighten financial conditions unnecessarily,” said Martin Whetton, head of fixed income and currency strategy at CBA.

Whetton said the JPMorgan Treasury survey showed a modest rise in longs, with active shorts dropping sharply, while in the options market some large premium has been spent on call spreads for short-dated expiries, “clearly looking for a rally on the other side of Jackson Hole”.

Indeed, Powell’s speech may sound much the same as the FOMC minutes delivered last week.

Most FOMC members said it “could” be appropriate for the Fed to start reducing its quantitative easing this year because its “substantial further progress” criteria on price stability was satisfied and close to being satisfied on its “maximum employment” goal, with “various participants” saying that economic and financial conditions was likely to warrant a ­reduction “in coming months”.

But “several others” indicated that QE tapering was likely to be appropriate “early next year”.

The minutes said the FOMC would “provide advance notice” before making changes to its balance sheet policy. The nascent concern in the market is that Powell could do that at Jackson Hole.

But the minutes also noted that “the increased prevalence of new virus variants, particularly the Delta variant, underscored the continued uncertainty about the foreign outlook”.

The Fed has used the overseas outlook as a reason to delay QE tapering in the past.

But FOMC members also noted that Delta’s spread “may temporarily delay the full reopening of the economy and restrain hiring and labour supply”.

Moreover, in discussing the uncertainty and risks associated with the economic outlook, “many participants remarked that uncertainty was quite high”, with a slowing in progress on vaccinations and developments surrounding the Delta variant posing downside risks to the economic outlook.

“A few other participants” suggested that preparations for QE tapering “should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising Covid-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so dampen the economic recovery”.

Those risks to the US economy have clearly worsened in the past week, even if the long-awaited full approval of the Pfizer-­BioNtech vaccine by the FDA this week will allow some vaccine mandates.

Powell will deliver his speech at Jackson Hole at 12am AEST on Saturday.

“We anticipate that chair Powell will deliver some hints around the timing, and possibly pace, of asset purchases following the recent strong labour market data,” said CBA’s senior economist and currency strategist, Kim Mundy.

“But elevated Covid-19 cases in the US may give Powell reason to pause.”