Brace for Powell Signaling Taper Is Near, Sparking Dollar Rally

(Bloomberg) -- Federal Reserve Chairman Jerome Powell is going to provide strong guidance that tapering will begin in 2021, lifting the dollar and stocks, if Bloomberg News’s MLIV strategists are right.

The majority view is that Powell will deliver a clear outlook for winding down quantitative easing, when he delivers his Jackson Hole speech Friday. Some common themes among the MLIV team are that tapering will lift both Treasury yields and the currency. The strength of the economy will keep sending the S&P 500 to records.

A tapering would mark the beginning of the end for the Fed’s unprecedented QE program, an emergency measure put in place to help the economy cope with the impact of the coronavirus. A scaling back would theoretically bring higher, more attractive Treasury yields, drawing money away from stocks and commodities. Views in the analyst community are split on whether Powell will provide a clearer guide on tapering.

The MLIV team considered what’s going to happen in markets. Here are some of the scenarios they pointed out:

• The Bloomberg Dollar Spot Index is likely to push past its Aug. 20 intraday high
• There are enough risks that the Fed may refrain from giving any guidance. That can also boost the dollar as investors seek the safety of the U.S. currency
• The bear case for stocks is that the delta variant will lead the Fed to delay tapering. Concern over a possible economic slowdown will undermine equities
• The bull case is that the Fed can scale back because the economy is doing well now, which will send the S&P 500 to further records
• This was probably the most down-home outlook: “Stocks should rise the most, cuz it is 2021 and that’s what they do.”

NOTE: This article was compiled by Bloomberg’s Markets Live team. The observations are those of the bloggers and not intended as investment advice. For more markets analysis, go to MLIV.

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