…Or the calm before… even calmer conditions?
Jerome Powell’s much anticipated speech is now just hours away, and the markets are not moving much at all as traders continue to sit on their hands. So, what do we expect to hear from the Fed Chair?
At best, Powell may offer us the clearest indication yet that tapering the $120 billion QE programme will start before the end of the year, without providing a definitive plan. At worst, he will say nothing new and wait until the FOMC’s meeting in September to provide a tapering timeline.
Now if he does provide us some idea when tapering will start and in what shape, the challenge for Powell would be not to scare the markets by inadvertently implying that the conclusion of tapering will herald an immediate lift off in interest rates. He needs to manage expectations without being too vague. I am sure he will use the rising cases of delta to buy himself a bit of time, in any case.
However, if he appears uncharacteristically hawkish then we could see some significant volatility as investors wake up to the reality that this may be the start of the end of the massive stimulus programme. In this potential scenario, which is not our base case, we could see yields jump, causing the dollar to rip and stocks could break down.
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