Fed Likely to Carve Familiar Path at Jackson Hole (August 25, 2021)

Zack Guzman: I want to shift over to what we've been watching and previewing here this week as we prepare for the updates out of the Jackson Hole Symposium, as we hear from the Fed speakers. Here, the market's slightly rising ahead of all that. And, of course, a lot of questions about what we could hear in the updates when it comes to the Fed's tapering timeline. And for more on that I want to bring on John Bellows, Western Asset portfolio manager joins us right now. I should also note, John also served at the Department of the Treasury, the acting assistant secretary for economic policy. So, John, when we focus in on this issue, and thanks again for coming on the show. It's interesting because as we've seen this rebound in Covid cases and the economic activity coming back, of course, inflation still in focus. Does seem like some had expected the timeline to be accelerated. But now a lot of questions about Delta. So what are you expecting to hear when we kick this off tomorrow?

John Bellows: You're absolutely right that there were some advocating for a faster timeline. You know, a few weeks ago we were hearing from a lot of them, Bullard, Waller, Rosengren, all regional Fed presidents and board members advocating for a faster timeline. I think over the last few weeks, though, that view is not in favor. So the minutes from the July meeting, I think, made pretty clear that that kind of hawkish view for a September start was in the minority, most favored a little bit of a slower timeline. I mean, I think you're right, is that more recently, the Covid Delta Covid surge is a concern. It's one that's likely to prove less impactful than previous surges. But nonetheless, it's a negative and it's a negative that they're going to have to factor into the outlook at the margin is going to make them more cautious. So I agree with you that a few weeks ago we were hearing from a lot of hawkish speakers looking for an accelerated timeline. But I think the combination of the July minutes and the more recent Covid surge has made that a pretty remote possibility. And I think instead, it's more likely the Fed proceeds on a kind of more deliberate and slower timeline.

Zack Guzman: Even if it moves back, I suppose the tapering a bit here, that is still the obvious expectation. And the language might might kind of indicate a bit more in terms of the thinking around it or rather how it might be implemented here. I mean, when you think about that, looking back to what we saw the last time, the market skittishness really kicked in around tapering and the taper tantrum back then. What are you expecting maybe to be different this time around as Jay Powell tries to update the timeline?

John Bellows: Yes, so I think Chair Powell has has taken somewhat of a different approach than than what Bernanke did in 2013 and in particular Powell has really kind of gone out of his way to overcommunicate about the taper plans. He's been talking about it for a year. You know, they've been signposting. He's promised to provide advance notice. And it's very different than Bernanke in May of 2013, I think surprised a lot of people. They weren't looking for a taper signal and all of a sudden, you know, Bernanke is talking about tapering. And I think it was that surprise that caused the volatility in 2013. And I think Powell's desire to avoid that is why he's been so deliberate in terms of communicating their plans. Now, what I would say is there's kind of a pluses and minuses to that type of overcommunication. The plus is, is that when the taper happens, it's not going to surprise anybody. So you know what, taper happens in November or December. You know, it's going to be one of the most widely anticipated and heavily foreshadowed events all year. And those types of events tend not to move markets. You know, it's the surprises that move markets. It's not, you know, things that have been kind of talked about all year. And so that's the plus. And I think that is why Powell has been doing that. I think the costs, though, the cost is that when you've kind of committed to this inertial strategy where you're talking about something and slowly making progress, making progress to it, you know, at the end, you perhaps have a little bit less flexibility. You've been talking about it all year, and you kind of have to follow through on it. And so, you know, in the last few months, you have a little bit less flexibility than you otherwise would. That's not to say they don't have any flexibility. It's just to say they have a little bit less flexibility than they otherwise would. And, you know, that could be a concern. We've seen that in previous tightening campaigns or removal of accommodation campaigns. I'm thinking about know the first hike in '15, maybe the last hike in '18, where there was some inertia in the policy process, and that inertia led them to perhaps not be as flexible as they could. So, again, I think the difference between now and 2013 is this overcommunication, lots of signposting, lots of kind of foreshadowing. That means there's not going to be surprises. That's probably a good thing. But but the disadvantages that perhaps they're a little bit less flexible in these last few months than they otherwise would be.

Zack Guzman: Yeah, the pro/con there when you think about the Fed as a whole, but of course, we're going to be hearing from the individuals at this Jackson Hole Symposium here on our air and going to be interesting to hear the different takes we're about to listen to. But John Bellows, Western Asset portfolio manager, appreciate you coming on here to chat with us today.