The markets will eagerly await comments Friday morning from Fed Chair Powell at the Fed’s annual symposium at Jackson Hole, Wyoming. With inflation falling from 40-year highs but still well above the Fed’s 2% target, Powell’s speech at the annual conference of global central bankers will come at what he has called the most difficult stage of the inflation fight: deciding how much more policy tightening is needed.
With inflation cooling but with the labor market still relatively strong, disagreement among Fed policymakers is emerging over how much more tightening is needed. Fed Chair Powell on Friday may outline how the Fed will assess whether interest rates should go higher and determine when it’s time to start lowering them. Former Fed Vice Chair Kohn said, “He will caution against easing too soon, and it would actually be helpful if he spells out what he means by data-dependence, tamping down the very strong reaction of markets to each piece of data.”
The Fed’s challenge is to bring down still too-high inflation while not tightening policy so much as to push the economy into recession. Although inflation has come down substantially from a year ago, the labor market remains tight, and nominal wage growth is above historical trends. The economy continues to hum along and has shown few signs of suffering from tighter monetary conditions even after the Fed has raised the fed funds target range to a 22-year high of 5.25% to 5.50%.
Policymakers disagree about when the Fed should stop hiking rates and how long they need to keep rates elevated. Some Fed policymakers argued that current interest rates are high enough as the higher rates have yet to work their way through the economy fully and worry that an ongoing tightening of credit conditions will have a bigger impact than intended. Other policymakers say the lags with which monetary policy is transmitted to economic activity are already being felt and that the Fed may have to tighten policy further unless they see more concrete evidence that inflation is on track to return to the Fed’s 2% target.
Despite the 10-year T-note yield climbing to a nearly 16-year high this week at 4.362%, the markets currently do not expect another Fed rate hike this year, pricing in a 16% chance for a +25 bp rate hike at the September 20 FOMC, a 51% for that +25 bp rate hike at the November 1 FOMC meeting, and a 44% chance for that rate hike at the December 13 meeting. Some analysts believe Fed Chair Powell will walk a fine line and not signal an end to the Fed’s policy tightening regime. Morgan Stanley said, “We expect Powell to continue to stress that the Fed will be data-dependent and consider the ‘totality’ of the data, keeping the September FOMC meeting a live meeting.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
