Financial markets brace for what could be a ‘very hawkish’ Jackson Hole speech from the Fed’s Powell

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Financial markets are bracing for Friday’s highly anticipated Jackson Hole speech by Federal Reserve Jerome Powell and expect him to signal the continued need for aggressive interest rate hikes to fight inflation despite the risks for economic growth.

That’s the broad conclusion of analysts, economists and investors on the eve of Powell’s remarks, a day after ex-dove-turned-hawk Neel Kashkari of the Minneapolis Fed said the central bank needed to continue tightening. monetary policy until inflation is clear. goes down.

Although US stocks DJIA,
-0.02%

SPX,
+0.11%

COMP,
+0.39%
moved higher on Wednesday afternoon, they struggled for momentum after Tuesday’s remarks by Kashkari. Stocks retreated from their summer rally over the past week as Fed officials reiterated their commitment to bringing inflation back to around 2%, even with signs of a slowing economy and despite a surprise on the drop in the US consumer price index in July.

Yields on Treasuries also rose in anticipation of aggressive Fed action next month, and Fed Funds futures traders resumed pricing with a more than 50% chance of a rise. 75 basis points in September. Such a move would be the third consecutive rate hike of this magnitude by the Fed, and the fifth overall increase since the central bank’s rate hike campaign began in March.

“The market is looking for a very hawkish tone from the chairman,” said Deutsche Bank’s Tim Wessel, Jim Reid and Henry Allen.

Hopes that the Fed might ease its aggressive rate hikes had resurfaced on Tuesday, after a string of disappointing US data that included a slump in new home sales in July. But those hopes are starting to fade, even as well-known analysts like the Goldman Sachs economist John Hatzius still see a chance for Powell to make a case for slowing the pace of rate increases. JPMorgan Chase & Co.’s Phil Camporeale also questioned why Powell should be too hawkish this week.

Here is an overview of the views:

“Hawk Clash”

“The case where a hawkish clash is coming is that the president more often than not has to speak publicly on behalf of the [policy-setting Federal Open Market] Committee, and this is an opportunity for him to slant his remarks to his own personal bias,” Wessel, Reid and Allen of Deutsche Bank wrote in a note Wednesday. Powell “may well personally weigh the balance of risk towards worse inflation, but let’s see if his trend is strong enough to satiate market appetite.”

Get ready and cover up

The Minneapolis Fed’s Kashkari “raises the bar on inflation hawkishness,” a sign that Fed communications are “intended to prevent easier financial conditions from prematurely destroying the work of the Fed,” Ben Emons said, Managing Director of Global Macro Strategy at Medley Global Advisors. At New York.

“The S&P 500 100-day moving average is at 4090, the next potential support zone,” Emons wrote in a note. “Call and put options with 4090 strike expiring 8/31 are now priced at nearly equal volatility. This reflects a market that is bracing with put options for super hawkish talk while hedging in appeals to an accommodating inclination.

‘Danger’ with half point hike

“Powell’s performance will convince the public that the Fed takes inflation seriously in the context of the dual mandate,” said economist Derek Tang of Monetary Policy Analytics in Washington.

“We still think September will be 75 instead of 50,” followed by a 25 basis point downgrade from November, Tang wrote in a note. The “danger” with a 50 basis point hike in September “is that it cuts off the good tail of 2022 results too soon, as the FOMC tries to convince the market of both a higher terminal rate and a a subsequent easing cycle.”

The hiking cycle is not over

“It’s safe to assume that one of Powell’s goals will be to communicate that there is still work to be done to fight inflation and that the bullish cycle is not about to end,” the analysts said. BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“In line with this theme, Kashkari’s comment that it is ‘very clear’ that the Fed needs to tighten monetary policy certainly resonates and we expect this to be just the start of a series of official headlines from this type – most of which will occur during the trading week. comes to an end,” they wrote in a note.

not so fast

“I think he will make an argument, like he did at his last press conference, to slow the pace of the increases,” Goldman Sachs’ Hatzius said.

“We had two 75 basis point moves. We expect that, barring significant surprises in the data, September’s move will be 50,” Hatzius told Bloomberg Television Watch on Tuesday. “I don’t think he will be specific on the number, but I think he will say there is a risk of over-tightening, and so it makes sense to go a bit slower than outsized increases.”

Stick to warmongering rhetoric

“Markets sold off ahead of President Powell’s keynote address at the Jackson Hole conference on Friday. The idea is that he will strongly reiterate the Fed’s commitment to lower inflation and perhaps indicate that outsized rate hikes will continue in future meetings,” said Tom Graff, chief investment officer at Baltimore-based Facet Wealth. interest rates in recent days.”

“It is extremely important that the Fed restore [its] reputation for price stability,” Graff wrote in an email. “So as a result, he’s going to deliver the same message he did at the FOMC in July, even if they start looking at the possibility of a pause early next year. They’re going to stick with this warmongering rhetoric until they’re 100% sure it’s time to take a break.

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