The Fed's Dovish Taper

Ever since the last Federal Reserve meeting, Fed members have been very keen to offer their views.

Even those who don't appear very often have crawled out from under their very expensive rocks and had their say.

All of this is surely part of meeting their pledge to communicate the taper to markets well in advance.

But it's going to be the most dovish taper you could imagine.

See, I think there's a good chance Jackson Hole will be used as a platform to reinforce the FAIT framework rather than turn excessively hawkish.

On the anniversary of the announcement I'd expect Powell to acknowledge strong progress in the recovery with a nod to the upcoming taper talks, before reminding the markets of the reasons FAIT was introduced.

Structural disinflationary pressures: Technology, globalisation, aging population.

Yes, there's inflation at the moment, but this isn't the inflation they're looking for.

It's driven by temporary supply/demand imbalances rather than a strong economy at full employment.

So, will they be in any rush to hike rates?

Absolutely not.

The imminent emergency may be over and a QE taper is justified, but reaching 'full employment' (and figuring out the new definition of 'full') is going to take a while longer.

Here's a good approximation where they all sit on the hawk/dove scale 👇

Recent comments from hawks to doves...  

Kaplan & Bullard are among the most hawkish members, but they don't have a vote in 2021...

Waller: “If the jobs reports come in as I think they’re going to…then in my view, with tapering, we should go early and go fast, in order to make sure we're in position to raise rates in 2022, if we have to,"

Bostic: (On labour market) “We are well on the road to substantial progress toward our goal,” “My sense is if we are able to continue this for the next month or two I think we would have made the ‘substantial progress’ toward the goal and should be thinking about what our new policy position should be.”

“Right now I’m thinking in the October-to-December range, but if the number comes back big” as with the last report “or maybe even a little bigger, I’d be open to moving it forward,” Bostic said. “If the number really explodes, I think we would have to consider that.”

Barkin: “I think it is fair to say on the price side we made substantial progress, maybe more than substantial progress,” “I believe there is still more room to run in the labor market.”

The employment-to-population ratio: Substantial further progress for him would be moving that figure somewhere in the range of 59%, compared with 58.4% in the latest report or about 61% in February 2020.

Bowman: "Despite the encouraging pace of recent hiring, employment is still far below where it was...I am hopeful that we will continue to build on this recent positive momentum, since there is more work to be done to get the economy back on strong footing,"

Powell: "The Federal Reserve believes it will make good progress toward full employment over the next few years.to meet the substantial further progress threshold for tapering, further things on employment must be met."

Clarida: "The fed has no intention of surprising anyone when it comes to tapering. I can definitely see fed announcing tapering later this year."

"Tapering and increasing interest rates are two entirely different considerations"

"Maximum employment is the highest level of employment that can be sustained while still meeting the fed's inflation targets. The participation rate will rise beyond the demographic trend."

Daly: "I'm looking for continued progress in the labor market, continued putting COVID behind us, rising vaccination rates, the things that are so fundamental to us saying that the economy has achieved that metric of substantial further progress,"

"Right now my modal outlook is that we will achieve that metric later this year or early next."

Evans: The benchmark for that bond “taper” is likely to be met “later this year” based on expected strong continued job growth.

“Everybody is wondering about September, November, December, January, I don’t think that one meeting on either side is going to have an important effect.”

“We should not preemptively end a strong improvement in the labor market because somebody is getting nervous about inflation,”

“I am going to be very regretful if we sort of claim victory on averaging 2% and then find ourselves in 2023 with about a 1.8% inflation rate ... That would be a challenge for our long run framework.”

“Inflation continues to be something that is going to have to behave differently over the next couple of years than it has over the last 10”

Brainard: “Importantly, I expect to be more confident in assessing the rate of progress once we have data in hand for September, when consumption, school, and work patterns should be settling into a post pandemic normal,”

If job gains continue at the same pace as the second quarter, about half of the 9 million jobs gap relative to the pre-pandemic trend would be made up by the end of 2021. “If, instead, the rate of job growth were to accelerate notably, those levels could be reached somewhat sooner,”

This is the thinking behind the new  framework 👇👇👇

The market seems to believe that the 'New' Fed will be just like the old Fed.

I wouldn't bet against Powell offering up a timely reminder at Jackson Hole...