Powell's last Jackson Hole speech could pack a punch
Fed-watchers will be focused squarely on whether Powell signals that he's willing to cut interest rates at the central bank's September 16-17 meeting. His public comments in recent months have been relatively hawkish, but those were all before the release of the weak July employment figures that fired up easing expectations.
Rates futures traders are pricing in an 85% probability of a quarter-point cut next month, with another 25 basis points of easing expected by year end. Powell's words on Friday could provide significant clarity about whether these positions are 'in the money' or not.
Given that traders are betting so heavily on an imminent move, the 'pain trade' will be if Powell holds the line that policymakers need to see more incoming data before resuming the easing cycle put on hold in December.
Investors have reason to be cautious. History shows Powell's Jackson Hole speeches tend to move markets a lot, especially the bond market. And even though Powell is often considered a policy dove at heart, his Jackson Hole set-piece speeches have usually pushed yields higher, not lower.
In the month following each of Powell's last seven Jackson Hole speeches, the 10-year Treasury yield has risen by an average of 21 bps, according to Reuters calculations. The dollar has risen 1.4% and the S&P 500 has fallen nearly 2%, on average, over the same period.
Stretching that out, the S&P 500 has risen an average of 2.3% between the late-August speech and year end, the dollar has gained 0.4%, while the 10-year yield has climbed 27 basis points on average.
But these averages mask some much bigger moves, especially in the month after the central bank jamboree in Wyoming.
The stand-out example is 2022 when Powell, in his Monetary Policy and Price Stability, opens new tab speech, invoked former Fed Chair Paul Volcker, warning of the "pain" that households and businesses were likely to face from the tight policy needed to slay inflation.
In the following month, the S&P 500 tanked 12%, the dollar rallied 5%, and the 10-year Treasury yield soared 75 bps.
Bond yields climbed at least 20 bps in the month following three other Powell Jackson Hole speeches, in 2018, opens new tab, 2021, opens new tab and 2023, opens new tab, the latter being another where Powell signaled a readiness to keep rates higher for longer.
Inflation today is not as lofty as it was two years ago, but, sitting around 1 percentage point above the Fed's 2% goal, it is higher than Powell would like. Meanwhile, on the other side of the Fed's dual mandate, unemployment remains at a historical low of 4.2%.
This year's theme at Jackson Hole is "Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy." Powell has stated that the unemployment rate is the best measure of the labor market. But that does not mean today's low unemployment rate will automatically lead to a hawkish speech - history shows that when unemployment starts to rise, it can move quickly, leaving the Fed woefully behind the curve.
Markets are probably prepared for some large price swings whichever way Powell leans.
It's also likely that Powell will use the platform to defend his tenure, just like his predecessors: Alan Greenspan, opens new tab in 2005, Ben Bernanke, opens new tab in 2012, and Janet Yellen, opens new tab in 2017. Given the unprecedented public pressure President Donald Trump has placed on Powell to cut interest rates this year, why would the Fed Chair not seize this opportunity to have his say?
"He may offer some soft guidance that rates may move lower at a coming meeting. But, this is his last speech at Jackson Hole. He may never again have a platform this influential to offer his view of how his history should be written," economists at UBS wrote on Friday.
Will he sign off with a bang? Markets are locked and loaded.
(The opinions expressed here are those of the author, a columnist for Reuters)
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