Fed's Powell in spotlight as markets await taper plans

With the US economy recovered from the worst of the pandemic crisis, there is much anticipation in global financial markets around Federal Reserve Chair Jerome Powell's speech on Friday to see if he will detail plans to roll back the central bank's massive stimulus measures. 

But concerns about the impact of the fast-spreading Delta variant of the coronavirus on the economy could make expectations of an announcement at the annual Jackson Hole central banking symposium premature.

"Powell's speech is not likely to provide any breaking insights," said veteran Fed-watcher Mickey Levy of Berenberg Capital Markets.

When Covid-19 transformed the world's largest economy last year, the Fed jumped into action to prevent a major recession, slashing interest rates to zero in March 2020 and buying huge amounts of Treasury debt and agency mortgage-backed securities to provide liquidity to the financial system.

Those programs likely saved the United States from a worse downturn, but were never meant to be permanent. 

The Fed has said it will slow the pace of its massive bond buying program then raise the benchmark lending rate -- though no action on the latter is anticipated anytime soon, potentially for years, while the former is viewed as a delicate task.

"It is most likely that Powell's speech will stick to the Fed's recent script of tip-toeing toward tapering and disassociating the unwinding of its asset purchases from the eventual liftoff of rates," Levy said in an analysis.

More jobs, higher inflation

Widespread vaccinations have allowed businesses across the United States to reopen fully, which has restored millions of jobs and brought the unemployment rate down to 5.4 percent last month, much closer to the pre-pandemic level of 3.5 percent.

But labor shortages and shipping issues have combined to create supply bottlenecks and fuel a spike in inflation to about four percent, though Fed officials see that eventually subsiding.