Jackson Hole: Will Powell come out all guns blazing?

The annual gathering of policymakers will kick off this Thursday in the Grand Tetons in Wyoming where Fed Chairman, Jerome Powell will deliver a closely watched speech at 1500 UK time on Friday.

This year’s theme, ‘Challenges for Monetary Policy’, is a suitably fitting one, ten years after the financial crisis. Trade wars, slowing global growth and plummeting bond yields all seem to indicate a deep despondency about the current trials and concerns in the world economy.  

And while primarily academic in nature, many of the speeches could be extremely relevant for the markets. For example, debates on the Fed’s inflation target are highly relevant as some FOMC members have been promoting an average inflation target mechanism as opposed to the current symmetric one, which would have significant long-term effects on monetary policy.

However, the symposium does offer a chance for the Fed to send policy signals and explain current thinking, especially after Chair Powell’s ‘mid-cycle’ interest rate cut at the last FOMC meeting. Indeed, it wouldn’t be the first time it has made markets move – see 2010’s pow-wow – when Chair Bernanke used his opening remarks to signal QE2, a fresh round of stimulus.

This time around, with markets currently pricing in around 65 basis points of cuts this year and for Fed funds to be cut to 1% by the end of next year, how does the Fed view this ‘mid-cycle’ compared to the two previous ones in the 1990s and will they want to make any statements that might create problems for it later.

Of course, President Trump upset the landscape twenty-four hours after the July rate cut by ratcheting up the trade war once more when he announced additional tariffs on all Chinese imports. It is the unpredictability of the trade war, coupled with inflation below the Fed’s 2% target and unemployment at 50-year lows, which leaves Fed officials in a tricky spot and we certainly think they may want to keep any larger cut in their back pockets in case market conditions and the economy deteriorate further.

So, Powell, like his many predecessors, will have to manage expectations, and especially consider how far the Fed’s dots market pricing for rates have moved relative to the Fed’s current projections, without disappointing markets. This is likely to entail changing its narrative to one which keeps the central bank’s options wide open, and  to future rate cuts even though Powell may also indicate that he doesn’t see major recession risks ahead. Those believing he will be more aggressive and pivot to a ‘whatever it takes’ mode may well be left underwhelmed. 

Interestingly, we had the release of the FOMC Minutes from the July meeting last night. Although technically ‘old news’, these showed that most participants joined Powell’s (hawkish) view of an insurance rate cut, with dissension from doves wanting a larger rate cut and hawks opposed to any move. 

With the help of continued trade tensions and overseas risks, this suggests another 25bp cut or even two, but is still some way off the current market pricing. Over to you, Jerome…