Significant Drop in US PMI Exceeds Expectations in August
Signs of Economic Slowdown Spread Amid Delta Variant Surge
Dollar Value Declines After Period of Strength
'Hawkish' Kaplan Suggests Possible Tapering Delay
Attention Focuses on Fed Chair Powell's Jackson Hole Speech
[Asia Economy New York=Correspondent Baek Jong-min] As the slowdown in the U.S. economy due to the spread of the Delta variant is confirmed by indicators, expectations are growing that the Federal Reserve's (Fed) asset purchase tapering may be delayed. While the market is closely watching what Fed Chair Jerome Powell will say about tapering at the Jackson Hole meeting this week, the U.S. dollar showed a sharp decline.
On the 23rd (local time), the research firm IHS Markit released the August Purchasing Managers' Index (PMI), indicating that U.S. business activity slowed for the third consecutive month amid the spread of the Delta variant.
The manufacturing PMI stood at 61.2, and the services PMI was 55.2. The composite PMI was 55.4. All PMIs fell short of market expectations. In particular, the services PMI was significantly below the expected 59.5. Although the decline in manufacturing PMI was limited, the downturn in the services sector, which accounts for two-thirds of the U.S. economy, was confirmed. A PMI above 50 indicates economic expansion, while below 50 indicates contraction.
Chris Williamson, an economist at IHS Markit, explained that the U.S. economic expansion sharply slowed in August, stating, "As the Delta variant spreads, consumers are reducing spending on services, and companies' efforts to expand sales are also limited."
The Wall Street Journal expressed concern, saying, "The biggest change is happening in the U.S. economy, which has led the global economic recovery after the COVID-19 crisis."
After the release of the July Federal Open Market Committee (FOMC) minutes last week, which revealed that most Fed officials considered tapering appropriate within this year, tapering within the year had become a foregone conclusion.
David Mericle, chief economist at Goldman Sachs, forecasted after the FOMC minutes release that "the Fed will signal asset purchase reduction in September, officially announce tapering in November, begin implementation in December, and end asset purchases by September next year."
Concerns about the economic recovery slowdown are being raised from within the Fed. The trigger was Robert Kaplan, president of the Dallas Fed and a 'hawk' advocating early tapering. On the 20th, Kaplan surprised the market by mentioning that if the Delta variant harms the economy, the early implementation of tapering could be reconsidered.
Edward Moya, chief economist at the foreign exchange investment firm OANDA, predicted, "There will be a tapering announcement within this year, but the pace of asset purchase reduction will be very slow, and a rate hike by the end of next year also seems difficult."
The outlook on tapering is likely to be revealed at the Jackson Hole meeting scheduled for this weekend. Chair Powell's speech is set for 10 a.m. on the 27th.
The Wall Street Journal expects that Chair Powell will clarify the Fed's policy direction amid internal divisions over future monetary policy and the sluggish economic recovery caused by the spread of the Delta variant at this Jackson Hole meeting.
On the other hand, Michael Darda, chief economist at MKM Partners, said in an interview with Bloomberg TV, "Chair Powell will try not to cause a big stir."
The Jackson Hole meeting has also not escaped the impact of the Delta variant spread. The Federal Reserve Bank of Kansas City, which hosts the Jackson Hole meeting, announced last week that this year's meeting will be held virtually. This reversed the earlier announcement in May that the Jackson Hole meeting would be held in person.
A major foreign media outlet explained that the change in the Jackson Hole meeting format shows the influence of the Delta variant spread.
As the possibility of economic slowdown becomes more apparent, the dollar index fell by 0.5% to 93.013 on that day. The dollar index had recently strengthened on expectations of Fed tapering.
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