Wall Street Reacts To Powell’s Dovish Nothingburger Speech

It was (at least a few weeks ago), supposed to be the most highly anticipated central banking event of the summer, where Jerome Powell was expected to reveal the timeline of the coming taper; instead it ended up being a marketwide dovish catalyst which sent stocks surging to new all time highs, the dollar sliding and yields sharply lower, as the best Powell could do – even as he said that  the central bank could begin reducing its monthly bond purchases this year, something everyone knew well by now – was mention the latest FOMC Minutes as a guidepost to tapering, all the while repeating that inflation may be transitory and is not in itself a catalyst to tighten.

The bottom line, and the reason for the market’s dovish eruption: Powell provided no explicit taper signal, as he likely wants to see more jobs reports for accumulated evidence that ‘substantial further progress’ on the labor market is being made, while dismissing soaring inflation as transitory.

Spoos rose during the address, rising above the nice, round 4,500 number for the firs time. Ten-year Treasury yields nudged slightly lower to around 1.33%.

Courtesy of Newsquawk, here is a snapshot hot take on what Powell said, and didn’t say:

• Fed Chair Powell did not provide any explicit signal that the Fed was on the cusp of tapering its asset purchases; accordingly, he also didn’t reveal anything about the timeline or modalities of the process.
• Like many other Fed officials, Powell suggested that the ‘substantial further progress’ threshold had been achieved on inflation, although there was still much ground to cover to reach maximum employment, although there had been clear progress, and consistent with the July meeting minutes, Powell said that despite the challenges, the US economy was on the path to a labor market before the pandemic; indeed, since July, there had been more progress on employment, though he also noted the further spread of the Delta Variant, and he would be carefully assessing incoming data and the evolving risks.
• On inflation, Powell argued that current levels were a cause for concern, although with substantial slack remaining in the labor market and the pandemic continuing, responding to temporary fluctuations in inflation may do more harm than good, adding that there was little evidence of wage increases which might threaten excessive inflation. Ahead, Powell argued that there was little reason to think underlying disinflationary factors have suddenly reversed, and were likely to continue weighing on inflation.
• Powell’s remarks were largely as expected, and tactically, has given the Fed more time to shape its view on tapering. Next week’s jobs report, comes ahead of the September FOMC, where many expect a ‘taper hint’; the Fed will then get to see two more jobs reports before the November meeting, essentially giving it three jobs reports before it could decide on when to taper — which would still be consistent with market expectations of the announcement in Q4, with a possible start at the end of the year.

The bottom line is that Powell is more focused on the labor market than inflation, does not appear to be overly concerned by the pandemic, although notes the risks that could threaten growth, and he likely wants to see more accumulated evidence that the labor market is moving towards the ‘substantial further progress’ threshold.

As Pantheon Macro’s Ian Shepherdson summarized, “In short, the song remains the same; the test for ‘substantial further progress’ has been met for inflation, but not for employment, and the Delta variant poses new risks. We still think it’s reasonable to expect the tapering announcement in November, but it could easily be delayed if the post-Delta rebound takes longer than we expect.”