What’s a realistic timeline?
Yesterday we got an example of how preoccupied the market is with Federal Reserve tapering. It was hardly a whisper of tapering:
“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”
Yet that sent a major shudder through markets with the US dollar climbing 30-40 pips, bond yields rising 4 bps and stocks falling. All that has reversed with market participants wisely concluding that nothing has changed, but it illustrates the tension around the Fed.
With that, it’s important to have a reasonable idea of what markets are expecting for a Fed taper.
The spot on the calendar that everyone has circled is the Jackson Hole Fed symposium. There’s no date released for it yet but it’s usually in the last two weeks of August and has been a favorite place of Fed officials to signal policy changes.
That timeline would give the Fed three more employment reports to digest. We’d need to see 500K jobs on average at the very least to get tapering in play, regardless of what happens with inflation.
I expect we’ll see more jobs so it will be on the table. But don’t expect the Fed to signal imminent tapering at Jackson Hole. A realistic timeline is that Powell signals they will start discussions there. Then we’ll get a formal hint in the September 16 FOMC decision. Then they’ll announce a taper on Nov 5 or Dec 16, which may not actually begin until January. Baring a surprise, it will be many months of tapering before rate hikes are firmly on the table.
That’s an extensive lead time and is what the market is expecting. It’s a reminder why dip buyers stepped in after yesterday’s brief freak out. Even a 2-3 month shift to this timeline isn’t particularly material; cheap money isn’t going away any time soon.