Powell’s Jackson Hole message will require a ‘delicate balance’: Morning Brief

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Thursday, August 24, 2022

Today’s newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

The Federal Reserve often insists it is not talking to markets. At least not directly.

The central bank’s two objectives, its so-called dual mandate, are maximum employment and stable prices — not a target on the S&P 500.

But it’s the market that Fed Chairman Jerome Powell may have in mind as the central bank kicks off its annual retreat in Wyoming today.

Fed watchers expect Powell’s message Friday morning to be a stern reminder that the beatings will continue until morale improves. Which in this case means the rate hikes will continue until inflation comes down.

Ahead of Powell’s speech, it seems the question is not about who needs to hear this message, but about how stern the Fed chair plans to be in his delivery.

“We expect Powell to reiterate his case for slowing the pace of tightening, while also stressing that the FOMC remains committed to bringing inflation down and that policy decisions at upcoming meetings—including in September—will depend on incoming data,” economists at Goldman Sachs led by Jan Hatzius wrote in a note on Tuesday. “This will require striking a delicate balance.”

The stage for a slowdown was set back in June, when the Fed actually accelerated its campaign of outsized interest rate hikes in the form of a 0.75% bump — the largest move since 1994.

Even with inflation still running at paces unseen since the 1980s, markets appeared to see the front-loaded rate hike — which was matched last month — as a sign that the Fed was not far from ending its rate hike campaign as inflation abates.

Stocks rallied, leading investors to speculate on whether the 2022 bear market had finally reached a bottom. But it was falling bond yields that caught the Fed’s attention, with the U.S. 10-year Treasury yield falling from just under 3.5% to 2.60% between mid-June and early August

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Markets appeared to not only be pricing in the end to rate hikes, but rate cuts, as soon as next year.

After Powell delivered another 0.75% rate hike, stocks ripped higher and rates kept going lower as investors continued to see these front-loaded hikes as a sign smaller moves would be coming in short order.

For a Fed attempting to use higher borrowing costs to slow a hot economy experiencing high inflation, the reversal in bond yields and overall loosening in financial conditions was likely an unwelcome development.

But Fedspeak in recent weeks has reiterated the central bank’s intention to continue marching higher on rates. And financial conditions have tightened in turn.

Evercore ISI’s Peter Williams wrote Wednesday that markets appear more “onside” with the Fed heading into Powell’s speech on Friday morning.

“[M]arkets are now correcting some with an increased recognition that the bar for cuts is higher than had been appreciated and the Fed won’t cut in response to economic weakness unless there is also decisive evidence that inflation is coming under control,” Williams wrote.

But like any relationship between an authority figure and their charge, the question for Powell on Friday is less about whether his words are heard and more about whether they’re believed.

A delicate balance indeed.

What to Watch Today

Economic calendar

• Initial jobless claims (252,000 expected, 250,000 previously)

• Second quarter GDP, second estimate (-0.8% expected; -0.9% previously)

• Kansas City Fed manufacturing activity, August (13 previously)

Earnings

• Peloton (PTON), Dollar Tree (DLTR), Dollar General (DG), Workday (WDAY), Marvell Technology (MRVL), Ulta Beauty (ULTA)

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