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ING / TD See Powell Leaning To End-Of-Tightening Message (2/2)

FED
  • ING: Given slowing inflation, more moderate labor cost developments, and weaker hiring despite strong activity, we think Powell will back the case for a September pause, but leave the door open to a further possible rate rise.
  • Standard Chartered: Powell may want to send a message of policy continuity rather than a warning on future policy tightening as at the last few conferences. However, with inflation and activity likely slowing he may see the sharp move at the long end of curve, unrelated as it is to policy expectations, as opening up more downside risk to asset markets than is needed now. He will avoid any indication that he is targeting long rates but may send a sufficiently ambivalent message on long yields, along with the usual anti-inflation mantra, to weaken the USD and notch down yields. The question is whether such comments will be enough in light of concerns elsewhere to reverse recent trends.
  • TD: Jackson Hole could be a good opportunity for Chair Powell to start laying the ground for the next evolution of the Fed’s post-Covid policy guidance. This includes an end-of-tightening-cycle message beginning to dominate Fedspeak in coming weeks, but policymakers driving home the point that absent a recession they will only cut rates if inflation expectations continue to normalize and when inflation is on a clear path toward 2%. It will push back on the idea that a soft landing is associated with early cuts next year. While it may be too soon for him to fully commit ahead of the September meeting, he could certainly start to plant the seeds in advance.
  • Wrightson ICAP: We doubt that the Chair’s remarks will be intended to shift the near-term outlook; how the market responds to the initial headlines in practice is always a wild card to some extent. The Fed is not ready to declare victory on the inflation front just yet, but it is getting closer to the finish line. With the price stability outlook starting to improve, financial stability risks may command more of the Fed’s attention in the next phase of this policy cycle – especially in light of the banking-sector turmoil earlier this year. We doubt that Chair Powell will wade into the debate over whether equilibrium real interest rates are rising. But we would not be surprised if the question of rising equilibrium interest rates surfaced in some form in this weekend’s presentations.
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