Jackson Hole – the small town in the Rocky Mountains is actually the scene of the most important central bank conference in the world every year. But for the second time after 2020, the US central bank, the Federal Reserve (Fed), is not inviting you to a face-to-face meeting, and due to the pandemic, central bankers and economists will only exchange ideas virtually with each other from Thursday to Saturday.
Fed Chairman Jerome Powell’s speech on Friday was eagerly awaited. He announced that the central bank could start to tighten the reins of its ultra-loose monetary policy again this year – provided that employment continues to rise.
This process, in English Tapering mentioned, but does not yet mean that the key interest rates will be raised immediately, which have been close to zero percent since the beginning of the pandemic. First, the Fed will cut back on its bond purchases.
Powell justified this with the “substantial progress” in the goal of achieving an annual inflation rate of two percent. There has also been “clear progress” on the Fed’s second goal, full employment. At the same time, however, the Fed must carefully monitor the spread of the contagious delta variant of the corona virus.
Powell’s comments are in line with the expectations of most experts who did not assume that Powell would provide specific information on the timing or extent of the tapering.
The American monetary authorities have repeatedly made it clear in the past few weeks that they would soon throttle bond purchases, Jörg Krämer had said before Powell’s speech. “Why should you speed it up now?” Asks Commerzbank’s chief economist. Because even the last labor market report in the USA would not have brought any new findings. Unlike the European Central Bank (ECB), the Fed not only cares about stable prices, but also about maximum employment.
Before Corona, the central bankers met here in person: The Teton Mountain Range in Jackson Hole
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Significant increase in prices
The Fed is currently buying government and mortgage bonds worth $ 120 billion a month. This is intended to stimulate the economy – in addition to the already low key interest rate of 0 to 0.25 percent. American monetary politicians believe that the inflation target has now been reached. In fact, prices rose 5.4 percent in July, but this is mainly due to higher energy and food prices, they appease.
The prices are supposed to rise by two percent, if they go beyond this in the short term, then that does not weigh so heavily, the medium-term price development is important, affirm the monetary policy on both sides of the Atlantic. Nonetheless, Volker Wieland, Professor of Monetary Economics at the Goethe University in Frankfurt, warns: “What has kept inflation below target in recent years was primarily import prices. We had a weak development there, but that may be very different in the future look.” The global delivery bottlenecks and the rise in freight costs are already having a major impact on import prices, warns Wieland: “That can become more entrenched than the central banks are projecting at the moment.”
When the Fed chairman at the time, Ben Bernanke, indicated a cutback in bond purchases in 2013, he caused great unrest. This led to a significant rise in interest rates and thus to considerable price losses for bonds. The emerging markets suffered particularly from this. This time, however, the American economy is booming, stimulated by the stimulus package launched by US President Joe Biden. In addition, the financial markets are better prepared.
Popular with tourists: Jackson Hole in the US state Wyoming
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Could the real estate market collapse?
Because the Fed, too, wants to avoid such a violent reaction from the financial markets as in 2013 as much as possible, says Carsten Brzeski, chief economist at ING Germany. Above all, the real estate market was fueled by the loose monetary policy. That is why the Fed will be very cautious about this entry into the exit: “If the American central bank applies the interest rate brake too quickly, the real estate market will collapse. And the Fed definitely does not want to see that.”
Observers now expect the Fed to announce a schedule for the exit after the Open Market Committee (FOMC) meeting on September 21-22. Then there would be another labor market report, says Commerzbank chief economist Krämer. That was a better basis to get over one Tapering to be able to decide. Commerzbank expects an actual decrease in purchases in the course of the fourth quarter. The ECB is unlikely to be impressed by this. The central bank still has to support the economy, emphasizes its president Christine Lagarde again and again.
Editor’s note: The article was updated on 8/27/2021 following Fed Chairman Powell’s speech.
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