Overall, Powell's comments were just what the market wanted: nothing too aggressive or too dovish. Powell did not provide an explicit signal of tapering, as he likely wants to see more jobs reports to gain cumulative evidence that "substantial further progress" is being made in the labor market, while dismissing higher inflation as transitory.

•   Fed Chair Powell gave no explicit signal that the Fed was about to reduce its asset purchases; consequently, he also revealed nothing about the timing or modalities of the process.

•   Like many other Fed officials, Powell suggested that the threshold of "substantial further progress" had been reached on inflation, although there was still a long way to go to reach maximum employment, although 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 its pre-pandemic labor market; in fact, there had been further progress on employment since July, although he also noted the increased spread of the Delta variant and said he would be carefully evaluating incoming data and the evolution of risks.

•   On inflation, Powell argued that current levels were 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 were likely to continue to weigh on inflation.

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

The conclusion is that Powell is more focused on the labor market than on inflation, does not seem overly concerned about the pandemic, although he points out the risks that could threaten growth, and probably wants to see more evidence that the labor market is moving toward the threshold of "substantial further progress."

A final thought... All the focus is on the normalization of the Fed's balance sheet, but we see little emphasis on the fact that the policy interest rate path 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, but quite another for it to become outright "restrictive."