Overall, Powell’s remarks were exactly what the market wanted: neither too aggressive nor too dovish. Powell did not provide an explicit signal of a gradual tapering, as he likely wants to see more jobs reports to gather cumulative evidence that “further substantial progress” is being made in the labor market, while ruling out higher inflation as transitory.

•   Fed Chair Powell did not provide any explicit indication that the Fed was about to reduce its asset purchases; consequently, he did not disclose any details regarding the timeline or the specifics of the process.

•   Like many other Fed officials, Powell suggested that the threshold for “substantial further progress” on inflation had been reached, although there was still a long way to go to achieve maximum employment—though there had been clear progress, in line with the minutes of the July meeting. Powell said that, despite the challenges, the U.S. economy was on track to return to pre-pandemic labor market conditions; in fact, there has been further progress on the employment front since July, although he also noted the increased spread of the Delta variant and said he would be carefully assessing incoming data and evolving risks.

•   On inflation, Powell argued that current levels were a cause for concern, although with substantial slack in the labor market and the ongoing pandemic, responding to temporary fluctuations in inflation could do more harm than good, adding that there was little evidence of wage increases that could threaten excessive inflation. Powell also argued that there was little reason to believe that underlying disinflationary factors had suddenly reversed and that they were likely to continue weighing on inflation.

•   Powell’s comments were largely as expected and, tactically, have given the Fed more time to form its view on tapering. Next week’s jobs report comes ahead of the September FOMC meeting, where many expect a “hint of tapering”; the Fed will be able to review two more jobs reports before the November meeting, giving it three reports before it can decide when to begin tapering—which would still be consistent with market expectations of an announcement in the fourth quarter, with a possible start at the end of this year or early next year.

The bottom line is that Powell is more focused on the labor market than on inflation; he does not seem overly concerned about the pandemic, although he does point out the risks that could threaten growth, and he likely wants to see more accumulated evidence that the labor market is moving toward the threshold of “substantial further progress.”

A final thought… All the attention is focused on the Fed’s balance sheet normalization, but we see little emphasis on the fact that the trajectory of policy interest rates remains quite benign—unless, of course, we are wrong about the transitory nature of higher inflation. It is one thing for monetary policy to begin a process of “gradual reduction” of unconventional monetary stimulus; it is quite another for it to become outright “restrictive.”