The market now expects tapering clues to emerge in Jackson Hole at the end of August

NEW YORK, July 29 (.) – Investors seeking clear guidance on when the Federal Reserve will begin to reduce its massive bond purchases waited Wednesday, with all eyes on the annual Jackson Hole conference of bankers central in August.

The central bank has been buying $ 120 billion in fixed income assets a month – $ 80 billion in Treasuries and $ 40 billion in mortgage-backed securities – to support the economy as it recovers from the impact of the pandemic. coronavirus, and markets have become obsessed with when the Federal Reserve will begin to reduce its purchases.

Powell said in June that there had been initial discussions about when to retire.

The Fed, which wrapped up its two-day meeting of the Federal Open Market Committee on Wednesday, appeared to advance that discussion, though there was no clear timetable.

“The Fed opened the door to tapering, but it hasn’t,” said Scott Kimball, co-head of US Fixed Income at BMO Global Asset Management.

Consequently, the market is now likely to focus heavily on whether the central bank will give further indications at the Jackson Hole conference, to be held August 26-28, on its policy of allowing inflation to skyrocket further. than normal to compensate for periods of low inflation, Kimball said.

“The Fed owes us an update on its thinking” given the economic recovery in the past year, Kimball said.

Rick Rieder, director of global fixed income investments at investment firm BlackRock, said he sees the Fed beginning to outline tapering in Jackson Hole, but will give more specificity at its September policy-setting meeting.

Powell said he is in the process of writing a speech for the event, but declined to give details.

“The Jackson Hole meeting may be another opportunity for the Fed to expand. Maybe they’ll give us details about the tapering and what it looks like, ”said Jake Remley, Senior Portfolio Manager at Income Research + Management.

Some analysts, such as Brian Rose, senior economist for the Americas at UBS Global Wealth Management, believe that the Fed could announce tapering in December.

Market reaction to the Federal Reserve’s monetary policy statement was moderate.

Benchmark 10-year yields fell to 1.228%, after briefly rising to a session high of 1.278% immediately after the Fed’s statement. The yield curve flattened, and the spread between the two notes years and 10 years it was reduced to 102 basis points.

“It looks like a nothing burger,” said Joseph Lavorgna, Natixis chief economist for the Americas.

Fed fund futures, a widely used security to hedge short-term interest rate risk, have been fully priced at a 25 basis point tightening for the first quarter of 2023, unchanged from before the publication of the Fed statement.

“We weren’t expecting this policy decision to cause too many waves and that’s exactly what it’s looking like,” said Ryan Detrick, senior market strategist at LPL Financial. “The Fed is seeing an improvement in the economy, but the economy still needs help and they are going to leave rates where they are.”

Still, some see risks ahead as the Fed eventually prepares to start raising rates.

Some, however, argued that the Fed should be more forthright in communicating its plans to withdraw its emergency support from financial markets.

“Deliberately reducing stimulus … is now so insignificant for the size of financial markets that not drafting a plan is more confusing than simply laying it out for markets to react (or not),” said BlackRock’s Rieder. (Information from Gertrude Chavez-Dreyfuss and David Randall; additional information from Stephen Culp and Herb Lash; edited by Megan Davies and Diane Craft) .. Translate serenitymarkets

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