Wall Street anticipates a less accommodating monetary policy by the end of 2021. All eyes are on the Jackson Hole meeting on Friday.
It’s a simple eight-letter word, but one that has this power to worry the markets: tapering. Its literal translation (declining) is not, however, alarming. But in terms of monetary policy, the tapering consists for a central bank, in this case that of the United States, to reduce its purchases of assets on the market.
This has the effect, through the interplay of supply and demand, to restore altitude to interest rates and tighten credit conditions. Everything that Wall Street hates, especially when it flirts with its record highs.
Towards a reduction in asset purchases
Last week, investors therefore showed their bad humor when they learned about the minutes of the Federal Open Market Committee, which is the detailed report of the last meeting of the Federal Reserve’s Monetary Policy Committee.
In this fifteen-page document, available on the Fed’s website (www.federalreserve.gov), they saw that this debate on asset purchases has been fully covered, with the use of the term hated no less than fifteen times. In fact, with an annualized growth of 6.5% in the second quarter of 2021, the GDP of the United States has already exceeded its level before the pandemic, in the fourth quarter of 2019.
“Real GDP has returned to its pre-crisis level twice as fast as after the great recession of 2008. If this rapid recovery was made possible, it is in large part thanks to the Fed, whose decisive action in the the start of the pandemic made it possible to avoid a negative shock on credit and, conversely, caused a loosening of financial conditions, explains Bruno Cavalier, chief economist of Oddo BHF. A dilemma then arises: should this policy be continued at the risk of fueling price pressures (goods and assets) or tightening it up at the risk of endangering the expansion phase? ”
In other words, as economic conditions begin to normalize, should we stay with abnormally high amounts of asset buybacks (at the current rate of $ 120 billion per month)?
A timetable specified by September
The question is not yet settled, especially since this interventionist policy is closely linked to the evolution of the labor market. Hasn’t the Fed already indicated that it will cut back on its purchases when “substantial progress” in job creation has been made?
In this regard, Jerome Powell, the president of the Fed, could specify the calendar, this August 27, during the symposium of Jackson Hole where the big money-makers of the planet meet every year since 1982.
“We are provisionally of the opinion that the Federal Reserve will announce a slowdown in quantitative easing at the FOMC meeting in September, with a slowdown in purchases from October,” predicts James Knightley, chief economist at ING. Comments from Fed officials suggest it will be fairly quick and most likely end in the second quarter of 2022. But that of course depends on the resurgence of the Covid. ”
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