All eyes were on the Federal Reserve this week leading up to the virtual Jackson Hole Symposium as markets awaited any news that the Fed would soon begin to “taper” their $120 billion of monthly bond purchases. Atlanta Fed President Raphael Bostic spoke early Friday morning saying “We should be trying to get our policies back into a more normal situation…We have been at a very extreme level of accommodation” and “the economy calls for us to pull off of that a little bit and let the economy stand on its own.” His comments added to those of Fed Presidents from Kansas City, St. Louis and Dallas this week urging an early taper. But it was Chairman Jerome Powell’s closely watched Friday speech that finally cemented the expectation that the Fed will begin tapering their bond purchases soon. Powell said the economy had now met the prerequisite of “substantial further progress” needed to taper, while also cautioning that they will be “carefully assessing incoming data and the evolving risks” as the Delta variant spreads rapidly. Powell was also careful to avoid a repeat of the 2013 “taper tantrum” when the 10yr yield nearly doubled in 4 months as the market assumed the beginning of the taper meant rate hikes were close behind. Powell sought to draw a sharp distinction between taper and rate hikes by stating, “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.” This carefully coordinated Fed communication seems to have paid off. The 10yr yield had risen about 10bp this week in anticipation the Fed would announce a taper, but following the Friday morning speeches, the 10yr rallied slightly to 1.33% at publication.
The economic news this week was mixed. New and Existing Home Sales were reported to have increased more than expected in July despite surging prices and limited inventories, while Durable Goods Orders fell slightly and a closely watched Purchasing Managers Index was weaker than expected for August. But more than 2/3rds of U.S. GDP comes from consumer spending and Friday’s Personal Income and Spending report showed that despite a boost in income from the advanced child tax credit payments, real consumer spending actually fell in July. With income exceeding spending yet again, the personal savings rate rose slightly to 9.6% which is up from 8.8% last month but down from 27% in March of this year and 34% in April 2020. A drop in the personal savings rate from earlier this year was welcome news for financial institutions flush with deposits and eager for loan demand so any rebound in the savings rate driven by even more government stimulus payments will be closely watched in the months ahead.
Personal Savings as a % of Personal Income: 2011 – Today
Source: Bloomberg, LP
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