The Federal Reserve’s Enormous Wild Card

by Greg Valliere, AGF Management Ltd.

Insights and Market Perspectives

Author: 8

July 23, 2021

The Federal Reserve’s Enormous Wild Card
July 23, 2021
THE FED WILL BEGIN SERIOUS DEBATE NEXT WEEK on tapering its asset purchases, which is no surprise since the economy is rebounding. But the timing and pace of this tapering is now greatly complicated by the highly contagious delta variant, which most experts believe will not peak until September or October.

THERE’S STILL NO WORD from the White House or the CDC on whether there will be new “messaging” on masks, injections for young people, booster shots, etc. But the steady drumbeat of Covid scare stories in the media may inhibit people and cool the economy. Numbers like yesterday’s jobless claims indicate that the economy may not be totally out of the woods.

SO WE BELIEVE DOVISH JEROME POWELL is in no rush to taper. According to an article in this morning’s Wall Street Journal, some Fed officials have discussed concluding the asset purchases around October 2022 so they could lift rates by late next year if conditions warrant.

IN THIS HIGHLY POLITICIZED CITY, there’s a sense that the Democrats could be vulnerable in the 2022 elections if inflation is still well above the Fed’s target of 2%-plus, excluding food and fuel, for personal consumption expenditures. (We think crime will be a bigger issue than inflation in the 2022 elections).

POWELL’S HAND IS STRONG: He’s widely respected on Capitol Hill, on Main Street, and in the markets. Reports earlier this week indicated that he’s the odds-on favorite to win re-nomination for another term as Chairman, starting in late February. He has detractors among progressives like Elizabeth Warren, but there’s not enough resistance to make much of a difference.

THERE’S VIRTUALLY NO CHANCE THAT POWELL would agree to a decision on tapering at at next week’s FOMC policy meeting. A more public airing of options could come at the Fed’s Aug. 26-28 Jackson Hole symposium. When the FOMC meets at the Sept. 21-22 session, it’s possible that the Fed could be close to a decision to begin tapering by late this year.

WE THINK THE TAPERING COULD TAKE UP TO A YEAR to complete, as the central bankers gradually reduce asset purchases amid a mixed economic outlook. The key, in our opinion, is not the supply of goods; bottlenecks will subside. The key is the labor market and wage pressure, which can be intractable.

IN ANY EVENT, a year from today the federal funds rate will still be virtually zero and Powell will still be Chairman. What no one knows is whether Covid variants will be eliminated by then; our fear is that the Covid threat will not subside any time soon — an enormous wild card for the Fed.


The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2021 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.

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