Fed chair Powell speaks Friday at 10am from Jackson Hole. It’s an important speech with very important implications for markets.
I expect Powell to be his normal hawkish self with regards to rates and the battle versus inflation – but not too hawkish. Rates have crept higher recently (especially the UST 10y), financial conditions are quite tight, and pretty much every inflationary data point we look at is trending lower and trending lower quickly. Powell needs to sound a little tough but not too tough. After a quick charge to 5% on short-dated UST interest rates, markets won’t like a harsh talk about inflation.
As we head into the showdown at Jackson Hole, the chart below tells the whole story of the past three years. Heading into 2020, the markets and the Fed were hand-in-hand on rates and inflation. Then the Fed did nothing while inflation rose throughout 2021. In 2022, the stepladder of rate hikes was the fastest in Fed history as the Fed attempted to play catch up on inflation. Now it looks like the Fed funds rate might be too high as inflation expectations are falling very quickly. If you are a central banker, the market is telling you at a minimum to “pause” on rate hikes. In fact, the next rate move might be a cut, not a hike. Such might not happen for 3-6 months but I believe the Fed is done for now. Late 2023/early 2024 will likely see a recession and chatter for rate cuts will emerge very quickly and very loudly.
Big day tomorrow – tune in.
Source: US Bureau of Economic Analysis, Federal Reserve Bank of New York as of August 24, 2023
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