When Jerome Powell steps up to the podium Friday at the Federal Reserve’s annual economic symposium, held virtually this year but traditionally near Jackson Hole, Wyo., he’s likely to deliver a speech that has had many revisions in the past two months.
While many market participants expect the Fed chair to announce a date and pace for tapering it’s $120 billion a month of bonds purchases, the dominance of the Delta variant of Covid-19 makes such a pronouncement less certain, some economists say.
“I was expecting him to maybe announce plans for tapering but the increase in the Delta variant makes it less likely,” said David Beckworth, a former international economist at the U.S. Treasury Department.
“We know for certain there’s 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 make a case for why they might still go ahead and taper.”
Some crypto analysts see tapering as an obstacle for bitcoin speculation, since quantitative easing is generally thought to give investors the liquidity to invest more in riskier assets. Because of macroeconomic uncertainty created by the course of the pandemic, bitcoiners may be able to continue to count on quantitative easing staying at the same pace or tapering at a slower pace than might have been expected a few months ago – when coronavirus-related restrictions looked to be nearing an end, as vaccines became more widely distributed.
“I would have more confidently said he was going to signal something more concrete than the committee has if this were maybe two months ago,” said Steven Kelly, a research associate at the Yale Program on Financial Stability. “I assume he’s ripped up a couple drafts in the intervening weeks given the state of the Delta virus and the fact that the conference itself has moved online due to disruptions.”
It’s possible that Powell will wade into the issue of stablecoins – digital tokens linked to government-issued currencies such as the U.S. dollar – and financial stability given that the issue came up in last month’s Fed meeting minutes. But given the importance of monetary policy at Jackson Hole, it’s unlikely that crypto will come up in the speech, Beckworth said.
Powell will also likely review what the central bank has learned so far with the implementation of its flexible average inflation targeting framework. The framework came at a good time because it allowed the Fed to respond to 2020′s inflation misses, but this past year has also made it more difficult to assess the success of the framework since most of the high inflation is supply-side inflation and not inflation across all prices, Beckworth added.
In last month’s Fed meeting minutes, officials at the central bank expressed an interest in delinking quantitative easing from interest rates, which could give the Fed more flexibility to maneuver without causing a “taper tantrum,” wherein market expectations for the Fed funds rate go up because investors expect interest rate hikes to follow, Kelly said.
Because most inflation has been driven by supply chain bottlenecks, the Fed won’t feel much pressure to taper in response to inflation headlines. Powell has characterized the elevated inflation rate as “transitory.”
“There’s a reason they do these purchases in the billions and trillions, is because it takes so much of it to have an impact,” Kelly said. “Even with hundreds of billions of dollars of QE we’re talking about, maybe a 100 basis points impact – if you’re lucky – on the 10-year yield.”
General inflation is subdued, said Stanford economist Erik Brynjolfsson. “The 10-year real yield is negative 1%,” he said. That’s the nominal yield on the U.S. government bond, minus the inflation rate.
“What that tells us is that people are willing to lend money to the US government at negative real interest rates, so there’s no real evidence of the economy overheating by that metric,” Brynjolfsson said.
With the $1 trillion infrastructure bill making its way through Congress, the pressure on the Fed to maintain economic growth may be eased, Brynjolfsson added.
“When the government spends money, it makes a huge difference as to whether that’s spent on investment like infrastructure, or whether it’s spent on current consumption, like payments to individuals,” Brynjolfsson said. “If it’s spent on investment, then that means that productivity is going to grow, capacity is going to grow, and inflation is going to go down. If it’s spent on consumption, then you don’t have more supply, and you don’t have more output.”
At the moment, it’s unknown when lower unemployment will lead to more general inflation and the Fed, policymakers, and Congress will want to test how far they can push the economy, Brynjolfsson said.
“For most of the past decade, the Fed has missed by having an unemployment higher than what their target was, and also having inflation lower than what their target was,” he said. “Both of those point in the same direction that the Fed has been too tight.”
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