The delta variant concerns will delay tapering by the Fed

In the latest Fed H.4.1 weekly release the amount on the reserve balance has increased for the 8^th consecutive week by $692bln with total reserves sat at $4.20trln. The Fed is also conducting a standing Reverse Repo Facility where it takes cash out of the banks and replaces some of the collateral that is needed, and that figure has risen to $1.4trln. Without that RRF reserves would be near $6trln and you would have thought rates would be zero or negative.

In the speech from Fed Chair Powell, he commented on the pace of the recovery from 17 months ago and how in an anomalous fashion personal aggregate income had increased in that downturn. Hinting at the way people have had more cash in their pockets to go out and buy stuff. The coronavirus has obviously disrupted supply chains and supply within a narrow group of durable goods and materials is not meeting demand. It is part of the Feds dual mandate to keep prices stable alongside creating economic conditions that support full employment, so seeing rising inflationary pressures is a concern for the Fed, and one which they are monitoring closely. Wage increases are welcome if they do not exceed productivity and profitability for the companies, as there is a higher probability that the companies would pass on the added costs to the customers.

The available cash chasing fewer goods has meant that durable goods for the first time in decades have seen inflationary pressures, as spending on big ticket items that include white goods and cars has risen 20% above pre-pandemic levels. For autos the prices may have stabilised and as there are only a certain number of cars that you can buy prices should start to fall as demand demises. What is needed is for the supply chain bottlenecks to ease so new cars and parts can allow manufacturers and dealers to meet upcoming demand.

The labour market outlook is brighter and there is evidence to suggest that companies are hiring faster than at previous times. The rapid re-opening of the economy is helping to bring people back to work, but it is also putting pressure on the supply chains. The increase in inflation due to the re-opening in the Feds assessment is also seen as temporary. They are looking for the rapid acceleration in prices and wages to flatten off as the data within the 12-month lookback window drops out from those early days post major lockdown, so sometime in Q2 of 2022 all that messy data should be out of the readings and a true assessment of inflation can be made.

Fed Chair Powell reiterated that inflation is anchored at 2%, that the current policy is well positioned and that the FOMC are prepared to adjust policy if necessary to achieve their goals. They are of the view that substantial progress has been met for their inflation test and that clear progress is being made towards maximum employment. He also said that he agreed with others at the July FOMC meeting that it could be appropriate to taper asset purchases, though the unknowns surrounding the delta variant of COVID-19 is a concern. Because there is still slack in the jobs data, they will keep the FFR on hold and won’t budge on that until the economy reaches conditions consistent with max employment and inflation at or slightly above 2% for a prolonged period.

Due to the lack of interest rate hike and no tapering the US dollar dropped in step with the benchmark US 10-year yields.