Commentary Directory

With That, We Carry On

Jacob Hess
August 30, 2021

The Week Behind

The Federal Reserve's Jackson Hole conference closed out the previous week with central bankers gawking over monetary policy research and updates. Chair Jerome Powell opened the proceedings with a speech titled "Monetary Policy in the Time of COVID." As many expected, he guided on tapering and how it should be expected in the latter half of 2021. However, he was very keen to separate the coming asset price reductions from rate hikes in the future: "The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test." The development of the effects of the Delta variant have brought about different conditions than were felt in Q1 and early Q2. In fact, the new peak in infections manifests the risks and uncertainties that the Fed had mentioned before.

The UMich consumer sentiment indicator showed the disruption the most in its most recent edition of the survey. The indicator fell -13.4% on a monthly basis in August dropping it -5.1% below the level from a year ago. Consumers' expectations worsened the most, a -17.6% drop, as the Delta variant caused them to be more cautious. There almost certainly will be a ripple effect in personal consumption that the Fed will heed in its review of economic conditions. Jobless claims also took a step back with an increase of (just) 4,000 to 353,000 in the third week of August adding to the stalling of the recovery there. However, the states with the highest infection rates aren't necessarily acting as one would suspect, so we are unlikely to see another capitulation to subsidized joblessness. This is good news for hawkish Fed members patiently waiting for the labor market that the central bank has clearly prioritized.

The biggest release of the week came at the end when the Bureau of Economic Analysis reported on personal income and outlays for July. The 1.1% monthly increase in personal income made a case for a strong summer as growth in jobs and wages bolstered consumer's financial prospects. However, in the same month, personal consumption growth slowed to just 0.3% MoM after a 1.1% gain in June, possibly showing the early effects of the Delta variant. Expect more disappointment in August. In addition to data on income and consumption, we got an update on the PCE Price Index and the Core PCE Price Index, the measures that the Fed use to track inflation for monetary policy. Both gained on a monthly basis, but at a slightly lower pace. The headline PCE Price Index yearly gain was 4.2%, quicker than June at 4.0%, and the Core PCE Price Index remained up 3.6% YoY. Both have been above the 3.0% level for 4 months now and show little signs of slowing. At face value, they also seem to be consistent with how the Fed envisioned post-pandemic inflation would run.

In the end, nothing groundbreaking seems to have come from the Jackson Hole meet-up. Expectations of tapering have been majorly updated with most commentary from banks and investors maintaining the view that tapering will begin in H2 2022. And because the Fed has warned of risks to their outlook along the way, there doesn't seem to be a huge surprise in the rise of Delta. And with that, we carry on.

Chart of the Week

Data for Dallas Fed, NY Fed, Phiadelphia Fed, NY Times

Employment indexes in many Federal Reserve manufacturing surveys have remained strong despite the recent rise in the COVID-19 infection rate. This suggests that the impact from the recent wave of Delta variant infections on the labor market is likely to be much weaker than the initial wave of the pandemic was. This should will allow the Fed to continue as planned on tapering.

The Week Ahead

Several more indicators of supplier activity in the US will be revealed as manufacturing orders data for July comes out. Personal income and consumption comes out after that. These reports follow the flurry of Flash PMI reports from IHS Markit that will give a glimpse of August business conditions. From Jackson Hole, the Fed will be watching these reports and hoping they will show some easing in the supply constraints. The solid industrial production from last week should give us hope that these economic releases will tell a similar story.