Financial markets are preparing for what could be a “very hawkish” Jackson Hole speech by Fed Chairman Powell

Financial markets are preparing for Friday’s widely awaited Jackson Hole speech by Federal Reserve Jerome Powell, and we expect it will signal the continued need for aggressive rate hikes to combat inflation despite risks to economic growth.

This is the general result of analysts, economists and investors in the run-up to Powell’s remarks, a day after the former dove turned into a hawk. Neil Kashkari From the Federal Reserve Bank of Minneapolis said the central bank needs to move forward with tightening monetary policy until inflation is clearly lower.

Although the DJIA US stocks,
+ 0.36%

SPX,
+ 0.51%

COMP,
+ 0.69%
They moved higher on Wednesday afternoon, as they struggled for momentum after Tuesday’s comments by Kashkari. Stocks pulled back from their summer rally over the past week as Federal Reserve officials reiterated their commitment to cut inflation to 2%, even with signs the economy is slowing and despite a surprise downside in US consumer price index in July.

Treasury yields have also soared in anticipation of an aggressive Fed move next month, and Fed fund futures traders are back in pricing with a probability of over 50% with a 75 basis point increase in September. Such a move would be the third consecutive rate hike of this size by the Fed, and the fifth overall since the central bank’s rate hike campaign began in March.

“The market is looking for a very hawkish tone from the president,” said Tim Weisel of Deutsche Bank, Jim Reed and Henry Allen.

Hopes that the Federal Reserve would reverse its aggressive rate increases resurfaced on Tuesday, after a round of… Disappointing US data That included a drop in new home sales for the month of July. But those hopes are starting to fade, despite well-known analysts such as the Goldman Sachs economist Jan Hatzius There is still a possibility that Powell will make an argument to slow the pace of price increases. JP Morgan Chase & Co Phil Camborelli He also questioned why Powell needed to be so hawkish this week.

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Here is a summary of the opinions:

hawk shock

“The case in which hawksbill shock will occur is that the president often has to speak out on behalf of [policy-setting Federal Open Market] Wessel Reed and Allen of Deutsche Bank wrote in a note on Wednesday. Powell may personally weigh the risk against worse inflation outcomes, but let’s see if his gauntlet is strong enough to satiate the market’s appetite.

Prepare and precaution

Ben Emmons, managing director of global macroeconomic strategy at Medley Global Advisors, said the Minneapolis Fed’s Kashkari “is raising expectations about inflation optimism,” noting that the Fed’s communications are “aimed at preventing easier financial conditions from an early downturn.” about the Fed’s work. in New York.

“The 100-day moving average of the S&P 500 is 4,090, the next potential support area,” Emons wrote in a note. “Put and put options with a 4090 strike expiring 8/31 are now priced at roughly equal volatility. It is a reflection of a market preparing for Uber’s tightening rhetoric while hedging calls for dovish sentiment.”

“Danger” with a half-point rise

“Powell’s performance will convince the audience that the Fed is serious about inflation in the context of a dual mandate,” said economist Derek Tang of Monetary Policy Analytics in Washington.

“We still think September will be 75 instead of 50,” Tang wrote in a note, “followed by a shift to 25 basis points starting in November.” The “risk” with a 50 basis point hike in September “is that it cuts the right tail for 2022 results in Very soon, when the FOMC is trying to convince the market of both the final interest rate and the subsequent easing cycle. “

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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 combat inflation and that the picnic cycle is not nearing an end,” said Ian Lingin and Ben Jeffrey, strategists at BMO Capital Markets.

In line with this theme, Kashkari’s comment that he is “very clear” the Fed needs to tighten monetary policy certainly resonates and we expect this to be just the beginning of a series of such official headlines – most of which will happen in the trading week to its end,” they wrote in a note.

Not so fast

“I think he’s going to make an issue, as he did in his last press conference, to slow the pace of increases,” Goldman Sachs’ Hatzius said.

“We had two moves of 75 basis points. Unless there are big data surprises, we expect the move in September to be 50,” Hatzius told Bloomberg Television’s Surveillance’s Surveillance, but I think he would say there is. It’s dangerous to over-tighten, so it makes sense to go a little more slowly than massive increases.”

Stick to the hawk’s speech

Markets were selling their gains in anticipation of President Powell’s opening speech at Jackson Hole on Friday. The idea is that he will forcefully reiterate the Fed’s commitment to lower inflation, perhaps signaling that massive rate increases will continue over the next two meetings, said Tom Graf, head of investments at Baltimore-based Facet Wealth. “This view has been the main driver of the stock sell-off as well as the rise in interest rates in the past few days.”

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“It is very important for the Federal Reserve to reestablish itself [its] reputation for price stability,” Graff wrote in an email. As a result, he will deliver the same message he sent at the July FOMC meeting, even if they start considering the possibility of stopping early next year. They will stick with that tough rhetoric even They are 100% sure that it is time to stop.”

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