It is expected that Federal Reserve Chair, Jerome Powell, when he speaks in Jackson Hole, Wyoming on Friday, will be very careful with his words. Joseph LaVorgna, down at SMBC Nikko Securities America, said, "He will likely stay as neutral as possible - he doesn't want to put himself in a difficult position." Market players were expecting a poor outcome, according to the decline in stock prices and the rise in Treasury yields. Some may urge the Fed to indicate that it has conquered the fight against inflation, however, most traders believe this would be ill-advised.
Jerome Powell has used his annual addresses at the Jackson Hole retreat since taking over the chair's position at the Federal Reserve in 2018 to present policy agendas which vary widely. This year, many anticipate the central bank leader will reevaluate his stance to a more neutral direction. With inflation slowing and the economy remaining stable, Powell is less likely to offer guidance or speculative statements about monetary policy. Joseph LaVorgna, chief economist at SMBC Nikko Securities America, predicts Powell will likely be as impartial as possible, giving himself more leeway. This contrasts with Powell's seemingly daring declarations of higher rates and potential economic hardship in 2022, and an alternative framework for rate hikes in 2020 until there was “full and inclusive” employment. Powell’s speech will start Friday at 10:05 a.m. ET.
Investors anticipated that Federal Reserve Chairman Jerome Powell wouldn't shift the markets on Thursday, however stocks dropped and government bond yields increased, with a downward trend that was experienced last year during his speech as well. DataTrek Research reported that the S&P 500 was down 2% in the five trading days leading up to his speech, and dropped 5.5% in the five days afterward. Despite the volatility in the market, it's unlikely that Powell will deviate from his planned remarks. Joe LaVorgna, a former member of the National Economic Council under President Donald Trump, suggests that the Fed doesn't need to push back against expectations of easing, because the federal funds rate is already in restrictive territory – a narrative that has persisted for the past year.
It is apparent that investors have finally come to terms that the Federal Reserve is committed to keeping inflation in check and will not let up until it is satisfied that the recent favourable inflation reports are sustainable. Powell has a fine line to tread – being clear that the Fed will not make the same errors from the past while also not being too harsh and causing the economy to face a possible downturn. "The Fed needs to prove that it can be relied upon. What Powell will say is extremely impactful and will become part of his legacy," said Quincy Krosby, the chief global strategist at LPL Financial. "He will be more strong-minded than neutral. But last year's comments will not be repeated. The message has already been conveyed."
It may be easier said than done, but inflation has recently dropped to between 3%-4%. However, energy costs have been on the rise this summer, and certain factors which initially reduced inflation are starting to become less potent. According to an inflation tracker coming from the Cleveland Fed, the figures for August are likely to be higher. Bond yields have spiked, partly in response to a possible inflation increase. Consumers are feeling the effect too, with total credit card debt surpassing the trillion mark for the first time and the San Francisco Fed's prediction that government transfer payments have just a few months of excess savings left. Although worker wages are increasing, inflation is still a major issue. Krosby asserted, "Once everything is accounted for, if we can't tackle inflation, how far do you think those wages will take people? From their credit cards, to food and energy, this is Powell's political bind." The Fed is currently leaning toward preserving high rates, with the potential for cuts in the future.
According to Philadelphia Fed President Patrick Harker, the Fed has reached a point where it's done enough. Talking to CNBC's Steve Liesman during an interview on Thursday in Jackson Hole, Harker remarked that "through my summer travels, it's become quite clear that the need to take some time to let recent changes be absorbed and understood is prevalent. This is a common sentiment amongst community banks and business leaders alike - before taking further action, allow the recent changes to be processed.”
Despite the temptation for the Federal Reserve (Fed) to declare victory in the inflation war, many market participants think that would be ill-advised. According to Krishna Guha, head of global policy and central bank strategy for Evercore ISI, "You'd be crazy to announce a 'mission accomplished' at this stage, and the Chair won't do it". Yet, some on Wall Street believe Powell could provide an outlook regarding the long-term estimation of rates - the so-called "r-star (r*)" value he spoke of at the 2018 Jackson Hole presentation. Guha believes that Powell will be careful to avoid making a strong statement on that subject.
It is anticipated that Powell will demonstrate a more sombre attitude, concentrating on the Fed's commitment to vanquishing inflation, rather than celebrating the success thus far. Michael Arone, Chief Investment Strategist of State Street's US SPDR Business, states that "The Fed likely isn't convinced inflation has been beaten. As a result, there won't be any curtain calls at Jackson Hole. Instead, investors should expect more tough talk from Chairman Powell that the Fed is more committed than ever to defeating inflation."
Comments