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Markets Brace As Fed Hawks Raise Stakes In Jackson Hole

Surely he wouldn't risk it - or would he?

If Jerome Powell intends to roll back the “mid-cycle adjustment” characterization of the July rate cut and its likely September sequel, his colleagues didn’t do him any favors ahead of his hotly-anticipated remarks from Jackson Hole on Friday.

Eric Rosengren on Monday said he wants to see concrete evidence that something’s gone awry before he supports any rate cut, Esther George on Thursday reiterated that the July cut “wasn’t required”, Patrick Harker said he only “reluctantly” backed last month’s decision and then, to top it off, Robert Kaplan told CNBC on Thursday afternoon that the Fed should be cautious about cutting rates again “unless we have to”.

Throw in the July FOMC minutes which suggested a somewhat broad consensus around the idea that a full-on easing cycle isn’t necessary (the account of the meeting showed most officials concurred with the characterization of the cut as a “mid-cycle adjustment”), and you’re left to ponder the distinct possibility that Powell may deliver a similarly “hawkish” message, despite (or perhaps because of) a month’s worth of market tumult and Trump tweets.

Note we said “because of”. It seems at least possible that the Fed has now reached the limit when it comes to allowing the tail to wag the dog, whether that means letting the bond market pigeonhole the committee into dovishness or permitting the White House to bulldog them into preemptive rate cuts.

And really, that’s all part and parcel of the same dynamic. Larry Kudlow and Peter Navarro have repeatedly said “the market” agrees with the administration on the need for rate cuts, which suggests Trump is aware that by creating uncertainty around trade, he can force the type of market positioning that makes it difficult for the Fed to disappoint expectations without tightening financial conditions, something they are reluctant to do.

It may be the Fed has decided that with a September cut already baked in, there is no utility in relenting to demands (implicit or explicit) for the telegraphing of a full-on easing cycle.

If Powell does intend to send a message to the bond market and to Trump on Friday, he’s probably aware that there will be consequences. In addition to any tweets that would accompany an adverse equity market reaction, the bond market will need to adjust. That could entail significant flattening pressure as the short-end prices in fewer cuts and the long-end rallies (or stands still) on the assumption that the Fed is further behind the curve when it comes to doing what’s necessary to protect growth and resurrect inflation.

Breakevens have plummeted ~20bps from the July meeting, conveying “substantial skepticism” about the prospects of the Fed achieving its mandate, BMO noted on Thursday.

Meanwhile, the dollar continues to be resilient, and 2-year yields rose on Thursday to the highest in more than a week.

With inflation expectations in a dive, term premia spillovers in full effect and investors more inclined to turn to Treasurys as a hedge than ever before, this is a perilous time for Powell to risk pushing back against the market, which is convinced it’s made its point when it comes to compelling an abandonment of the “mid-cycle adjustment” story.

(BofA)

Against that backdrop, a hawkish message from Powell runs the risk of amplifying Rosengren, George and Harker, on the way to creating more flattening pressure, unwanted dollar strength and, likely, significant equity market volatility.

Surely he wouldn’t risk it – or would he?


 

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11 comments on “Markets Brace As Fed Hawks Raise Stakes In Jackson Hole

  1. Yeah, all that market tumult, yet S&P is still over 2900. I see hawkishness tomorrow. Any additional dovishness would come at the Sept press conf and only after a 10+% dip in risk assets.

  2. H-Man, the world is imploding on rate decreases. Forget the US, the fed will capitulate to the world, and will cut rates to accommodate those pressures . The question is what happens when the US hits the zero rate line.

  3. 3% dump and I’m 100% cash… I quit.

  4. I think the Fed won’t let Trump or the bond market tell it what to do. I sense that many market participants feel sickened by all the bullying of the Fed by the markets and Trump, a sort of disgust with where we have sunk to, the insatiable desire for more sugar without a thought or care of where this leads the market in the future, a sense of complete chaos. And here is the paradox, it may be that if Powell pushes back and says, “NO, you can’t have any more candy, go to bed!” we may paradoxically get a rally, as some sense of order and thoughtfulness is restored. We got a hint of that with the rally back after the sell off caused by the two hawkish Fed speeches this morning. NASDAQ did get a daily bearish engulfing candle, but both the Dow and S&P did not. So tomorrow we may get weakness at the open and then when Powell speaks at ten, perhaps an initial selling wave that eventually rallies back and we get bullish engulfing candles on the daily for all the indices.

  5. Wernher von Braun Jr

    re: “protect growth and resurrect inflation”

    Let’s be clear, the Fed has no problems with inflation and I don’t recall that growth is a primary objective, i.e., I think their mandate is is to provide stability. Hence, it’s not the job of the Fed to game markets and make sure that everyone around the globe that speculates in markets has guaranteed bets. In this specific case with trump being a maniac, it’s the Fed’s job to provide measures of stability, which may include allowing the market to crash short term in order for the Fed to demonstrate that they don’t give a shit what the markets or trump are crying about. If anything, once the Fed lays that groundwork and initiates a fight, trump will be boxed in and contained, looking like a total idiot –, and then the market will come around with investors buying the dip. This isn’t rocket science!

    • Lance Manly

      Core CPI is 2.2% Y/Y and 2.8% for the past three months. I think the resurrection happened.

  6. George, Kaplan, Rosengrin, and Harker (non-voting) have Powell’s back, and even Bullard realized he got too far out over his skies. Powell will do fine and tomorrow will be a non-event. Have a great weekend!

  7. Homescan 101

    On the issue of inflation — is anyone here somewhat aware of what Nielsen Homescan is? If not, it’s the greatest joke of all time and an issue that is at the core of Fed inflation (bullshit).

    It’s a very fun inflation topic which is very much under the radar:

    Many of the price differences may be driven by the way Nielsen imputes prices: when available, Nielsen uses store-level prices instead of the actual price paid by the household. There are also differences by household type in the tendency to make mistakes that are correlated with demographic variables. However, the fraction of variance explained by the documented recording errors is in line with other research data sets for which cross-validation studies have been conducted.

    https://www.ers.usda.gov/publications/pub-details/?pubid=46114

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