Today’s release of the notes from the Fed’s July28-29 meeting reveals the Fed committee members’ opinions reflect the general mood amongst market participants: uncertainty about the future during this time of “uncharted territory” of the Covid recovery. Last week’s historically low Consumer Confidence report and yesterday’s drop in retail sales underline the bumpy path of the recovery. The Delta variant surge is affecting demand.
The Fed: tapering of bond purchases “soon” looks like it’s happening. The members disagree on how soon and how fast. Some want to announce in the next few months and begin tapering this year, others want to see more data on the recovery and start next year. Interestingly, some members are calling for a quicker deceleration of purchases than the last taper in 2014. Instead of a gradual 12 month period, it could be 6 months. That would mean lowering purchases by about $20 billion a month. Will that disrupt financial markets? Besides the inflation concerns, much of the debate centers on whether the Fed’s employment goals are close to being met. The data is not determinative. Yes, there are still about 6 million fewer jobs than pre-pandemic. But unfilled job openings and labor shortages are being seen in several sectors and regions. The pandemic has possibly created a “great reset” as the labor market is shrinking, many workers are not returning to their old jobs. People are taking early retirement and moving to different sectors. So perhaps “full employment” is an illusory goal that will be difficult or impossible to achieve. The 10 year T is at 1.27% and investors will now look to Powell’s remarks in Jackson Hole next week as for potential policy announcements. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners