The pound was higher against the US dollar on Monday amid little economic data releases and thin trading. The US dollar fell after Friday’s dovish speech by Fed Chair Jerome Powell. Jerome Powell indicated Friday that the central bank will possibly begin tapering before the end of the year, but a rate hike was not imminent as there is still “much ground to cover” before the economy reaches full employment. At the same time, there could be some risk ahead for the pound, due to renewed Brexit concerns.

Jackson Hole symposium

In his much-anticipated speech at the Jackson Hole symposium, Fed Chair Jerome Powel said that the central bank could start tapering its stimulus programme by the end of the year, easing market fears for a quicker withdrawal of its funding.

The Fed took its benchmark rate down to almost zero and accelerated its quantitative easing programme in an attempt to resuscitate the economy during the early days of the Covid-19 pandemic.

The question of when the Fed will begin to tighten its programme has been the main concern for markets for some time now, and it might remain as Powell avoided to give any definite answers. The Fed is aware that any specific answers could seriously impact the global economy, this is why it has chosen to postpone any reduction of its funding.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” Powell said during the summit. He added that inflation is close to the Fed’s 2% target rate, but “we have much ground to cover to reach maximum employment.” Markets reacted positively to Powell’s comments, with major stock indexes rising higher.  

Fed Vice Chairman Richard Clarida also agreed with Powell’s remarks. He explained that tapering could be possible by the end of this year, as long as labour gains continue: “I think that if that materialises, then I would support commencing a reduction in the pace of our purchases later this year,” Clarida noted.

The Fed said that “substantial further progress” will need to be seen before tightening policy. Powell said that in terms of inflation the “test has been met” and that there “has also been clear progress toward maximum employment.” He said that the Fed agreed at the July Federal Open Market Committee meeting that “it could be appropriate to start reducing the pace of asset purchases this year.”

Powell defended the Fed’s policy and decision not to make an “ill-timed policy move” and stated: “Today, with substantial slack remaining in the labour market and the pandemic continuing, such a mistake could be particularly harmful. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.” Additionally, he stressed that the delta variant “presents a near-term risk” but “the prospects are good for continued progress toward maximum employment.”

Renewed Brexit concerns

The UK government supply chain crisis could have a significant impact on Christmas and create further food shortages over the next year too. Iceland, Nandos, KFC, McDonald’s, and Tesco are among the many businesses that are reporting stock issues as a result of lorry driver shortage due to Brexit. Restaurant chains Nandos and KFC are facing chicken shortages, McDonald’s is finding it difficult to make milkshakes and Iceland is running out of bread and soft drinks. The problem has become noticeable over the summer when social media was flooded with images of empty shelves.

The disruption was then largely blamed on the “”, but businesses have for a long time now warned of a chronic shortage of lorry drivers due to Brexit. Speaking to BBC Radio 4’s Today programme, Iceland managing director Richard Walker said the lack of lorry drivers “is impacting the food supply chain on a daily basis.” “We’ve had deliveries cancelled for the first time since the pandemic began, about 30-40 deliveries a day,” he said.

British Poultry Council chief executive Richard Griffiths said last week that “When you don’t have people, you have a problem - and this is something we are seeing across the whole supply chain. The labour crisis is a Brexit issue,” he said.

Nick Allen of the British Meat Processors Association warned that such shortages will impact on Christmas staples: “We are cutting back and prioritising lines and cutting out on things, so there just won’t be the totals of Christmas favourites like we are used to.”

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Sterling rose to an eight-month high due to dollar weakness and after Federal Reserve Chairman Jerome Powell said on Thursday that the Fed will tolerate inflation above 2.0%. This gave investors hope that the Fed will not try and control economic growth, something that could hurt the US dollar in the near future. On the other hand, on Friday, after Bank of England Governor Andrew Bailey’s speech, the pound remained unmoved. Both Bailey and Powell gave their speeches at the Jackson Hole central bank symposium which was held online this year rather than at the usual ski resort in Wyoming.

Fed’s decision marks a significant shift in monetary policy

The Federal Reserve has approved a significant change in the way it sets its interest rates by abandoning the usual practice of raising them to control higher inflation, something that will leave US borrowing costs extremely low. By signalling that it wants inflation to rise moderately above its 2% target, the Fed confirmed that inflation targeting in a world of lower interest rates is a thing of the past.

Andrew Bailey’s speech

On Friday, the Governor of the BoE delivered his keynote address to fellow central bankers online and not from the actual ski resort in the Grand Tetons where the conference was traditionally organised since 1982.

In his speech, Bailey said that central banks have a lot of strength to use quantitative easing to manage crises, such as Covid-19. As he noted characteristically, “Go big (and fast) or go home.”

The Bank of England governor did not provide details over short-term policy or on the UK economic situation, but he did reassure the financial community that the Bank will be able to deal with future crises: “We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.”

He also said that the Bank won’t seek to restrict monetary policy until there is significant economic progress: “The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.”

According to Bailey, QE will be “more long-lived” and that the Bank has the power to fight recessions. In regard to Jerome Powell’s comments from yesterday, Bailey said that these suggest that flexibility can be useful for monetary policy and that a different exchange rate environment could justify different approaches.

The Bank of England increased quantitative easing by £745 billion in June, and in March it cut its main interest rate to a record low 0.1%. A paper with the Bank’s conclusions will be published alongside Bailey’s speech.

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