Anticipated hawkish message

As the Federal Reserve officials gather for the annual symposium in Jackson Hole, Wyoming, all eyes are on Fed Chair Jerome Powell’s keynote speech. The speech is anticipated to provide insights into Powell’s views on interest rates, the economy, and inflation. It is widely expected that Powell will reiterate his hawkish stance and counter the rising expectations of a dovish policy shift. Powell’s speech is likely to signal that further rate hikes will be necessary to prevent a surge in inflation. The belief is that he will emphasize that interest rates will remain elevated for an extended period, and he might discourage the idea of rate cuts.


Market indicators

The bond market seems to be preparing for a more hawkish monetary policy ahead, as the U.S. benchmark 10-year Treasury yield reached a 15-year high of 4.366% last week. The stock market’s year-to-date rally has slowed, with the S&P 500 down 4.4% in August so far. Traders focusing on the Fed’s policy rate now see around a 40% probability of another rate hike by the end of this year, up from the previous week’s estimate of about 30%.


Factors influencing Powell’s stance

  • Strong Economy: Recent robust economic data has demonstrated resilient consumer spending in July, with retail sales seeing their largest monthly gain since February. The economy has performed better than expected, contradicting previous predictions of a downturn.


  • Hot labor market: Despite expectations, the U.S. labor market remains strong, with wage gains and unemployment at 3.5% in July. This signals room for the Fed to continue raising rates.


  • Reaccelerating inflation: Inflation rates have been increasing, with consumer prices rising by 3.2% in July. Powell has indicated that while inflation has moderated, it is still far from the Fed’s 2% target, suggesting continued need for policy adjustments.


What we think

Given the robust economy, strong labor market, and reaccelerating inflation, Powell is likely to maintain his hawkish stance during the Jackson Hole symposium. There is a consensus that the current environment doesn’t warrant a policy pivot, and the Fed is expected to remain committed to addressing inflation pressures.


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