Wentz Weekly: Powell Signals Tapering By Year End

Wentz Weekly Insights
Powell Signals Tapering By Year End

Leading up to the keynote speech by Federal Reserve Chairman Powell at Jackson Hole, most Fed district bank presidents are typically interviewed to give their perspectives on economic conditions, monetary policy, and answer questions. Even though the event went virtual again this year, we still heard from many of the Fed district bank presidents, most of which gave a more hawkish view than what Powell had portrayed in his speech. Dallas Fed President Kaplan said “we’re seeing resiliency” in businesses and consumers. The Fed banks are in communication with businesses and consumers and conducting surveys and so far they have seen no change in conditions due to the delta variant and have not changed their view on economic conditions or the path of monetary policy. Kaplan went on to say there is a concern about inflation but also concern for excess risk taking which he says has led to some distortions in financial markets which could lead to unintended side effects. Kansas City Fed president Esther George said with current conditions the level of accommodation is not needed and she supports tapering sooner than later. Fed governor Richard Clarida, Christopher Waller, Cleveland’s Loretta Mester, St Louis’ James Bullard, Atlanta’s Raphael Bostic, and Philadelphia’s Patrick Harker all echoed similar comments. At the end of the day, the one that carries the most weight is Fed Chairman Powell.
The S&P 500 made its 52nd record high of the year on Friday following Jerome Powell’s much anticipated (virtual) speech at the Jackson Hole Economic Symposium. Powell reiterated much of what we already knew but made an upgrade on his assessment of the labor market. The Chairman of the Fed said its inflation goal has been met, and was confirmed again with another inflation reading showing a 4.2% increase in prices from a year ago according to the personal consumption expenditure price index, but he continues to believe many of these inflationary pressures will ease and are not a cause for concern. Powell shifted his tone on the labor market, saying “clear progress” has been made on working back to maximum employment, an upgrade from his prior statements that “substantial further progress” is still needed. Powell also made it clear scaling back quantitative easing will not “carry a direct signal regarding the timing of interest rate liftoff” which the Fed will have a “substantially more stringent test,” which we translate to Powell saying the Fed is nowhere near raising rates and much further progress is needed in the economy before even considering this. Our view is Powell is being cautious and does not want to act too soon with the risks of the Delta variant and still 5.7 million people without a job compared to February 2020. We believe if the August labor report exceeds expectations on Friday, Powell will be prepared to announce a taper plan at the conclusion of the September 21-22 FOMC meeting and begin tapering in October or November. As of now, the consensus sees an additional 740,000 payrolls in August. Remember, tapering does not mean tightening, it just means letting off the gas pedal a little.
The House committed to holding a vote on the $1 trillion bipartisan infrastructure bill in a compromise to pass a measure to approve the $3.5 trillion budget resolution, unlocking the reconciliation process in a key move for the Democrats. Lawmakers and committees are now working on drafting detailed spending plans outlined in President Biden’s Build Back Better agenda that includes significant spending on “human infrastructure”. The measure passed along party lines 220-212 and once formalized if it moves to the Senate it can pass with a simple majority under reconciliation rules. To get to this point, Pelosi had to negotiate with 10 moderate Democrats who wanted to hold a vote on the already Senate approved $1 trillion infrastructure bill before moving forward with a budget resolution. In return, Pelosi committed to a September 27 deadline to hold a House vote on the bill, which includes spending on physical infrastructure such as roads, bridges, airports, water, and broadband. For the budget bill, party leaders have set a September 15 deadline to draft spending plans which puts pressure on Democrats to work on the budget quickly.
Personal income and consumer spending remains strong into the summer months and shows no sign of slowing down. According to the Bureau of Economic Analysis, in July income rose 1.1%, well above estimates, with wages and salaries rising a strong 1.0%. The others category of government social benefits, which in past months included stimulus payments, rose 23% in July, reflecting the advanced payments of the child tax credit many families received on July 15. Families with children receive a credit of $3,000 per child ($3,600 if under 6) and Biden instructed half of the credit to be given in advanced payments from July through December. That means a family of 3 (over the age of 6) would receive $750 per month from July to December. On the other hand, consumer spending rose 0.3% as expected, driven by a 1% increase in spending on services. The increase in spending on services was offset by a 1.1% decline in spending on goods as consumers continue to shift their spending on services away from goods as people get more comfortable going out. Much of the could possibly be attributed to less vehicle purchases due to the chip shortages as durable goods purchases was down 2.3% in the month. Because of the higher income, the savings rate increased in the month to 9.6% from 8.8% in June (versus the 10-year average prior to the pandemic of 7.2%). Americans are saving a historically high amount of disposable income, something we think will continue to fuel growth going forward.

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