Federal Reserve Chair Jerome Powell inched closer to starting the taper of its asset purchases, however, he remained unclear about the timing which basically gives it leeway to act at the September meeting, November meeting, or even push the decision to early next year. This wasn't entirely surprising as many speculated that the meeting going virtual due to COVID concerns decrease the probability of aggressive action.

Overall, it was certainly more dovish than expected, leading to a broad-based rally in the S&P 500 (SPY  ), Nasdaq (QQQ  ), and Russell 2000 (IWM  ). In addition, bonds moved higher as well with the 10-year yield dropping by 25 basis points to 1.32%. Even more, economically sensitive parts of the market which have been underperforming in recent months had strong rallies. The Fed's hawkish bias and signs of slowing growth have led to a risk-off mood in the markets despite the large-cap dominated indices continuing to trend higher.

One reason for the bullish reaction may have been Powell's insistence that despite tapering being near, the central bank was nowhere close to actually raising rates. He said the economy was making gradual progress but remained off its pre-coronavirus levels especially in terms of the labor market. Currently, the unemployment rate is 5.4%, down from April 2020's 14.8%. However, this was at 3.5% prior to the pandemic.

Powell did acknowledge that inflation is now at the Fed's 2% target despite more gains needed to reach maximum employment. However, he continues to see inflation as transitory and expects it to drop in the coming months. In terms of the delta variant, Powell said that it poses a near-term risk but the situation is markedly different than last year given the availability and effectiveness of vaccines.

Overall, the Fed seems ready to taper at one of its next 3 meetings, however, it seems unlikely to hike until the economy makes up the 6 million jobs that were lost and have yet to be made up. Of course, inflation could change their plans but the softening of commodity prices and forward-looking indicators favors that the worst of the inflation spike may be over.