Powell To Reiterate Data-Dependent Stance, Keep Dec Hike In Play (1/3)

Fed Chair Powell delivers a speech and participates in a Q&A at an Economic Club of New York event at 1200ET (1700UK) today. With the pre-Nov 1 FOMC decision blackout period beginning this weekend, this is effectively the "last word" on Fed messaging before the meeting. It's also the only monetary policy commentary that Powell will have given since September's press conference. A few areas of interest:

"Cautious" nod to a November pause but keeping December firmly in play: We'd expect Powell to repeat much of the same language on future decisions as he did in September: "We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks. Given how far we have come, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks."

• Judging from most FOMC participants' commentary since September, that "careful" approach has been broadly adopted, and there appears to be little appetite to hike in November (in large part because of rising longer-end yields doing the job of tightening - see next note). But while not pre-committing in any way, Powell could nod again to September's Dot Plot which penciled in another 25bp hike by year-end as the median participant's baseline - effectively keeping December in play but in a data-dependent way, and nodding to the 2 upcoming inflation and employment reports between now and then as key to the assessment. Expect him to be vague - but to reiterate that once they've raised rates to a sufficiently restrictive level, they "intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective".

How will the rise in Tsy yields impact the Fed's policy decisions? Fed officials have - unusually - put rising longer-end yields front-and-center in communications the past few weeks in what looks like a coordinated effort. This is an unusual dilemma as previous inter-meeting periods have seen financial conditions effectively loosen despite the Fed's higher-for-longer message, but this time, 10Y Tsy yields are up 60bp since just before the September FOMC decision. There's very little likelihood Powell will even hint they've risen too far, but there will be significant attention of whether he discusses how the Fed regards the drivers of rising yields and whether they're doing some of the Fed's tightening job for them. At September's press conference MNI asked Powell about the Fed’s view about what had been driving the increase in recent weeks and he replied with the following:

• "So you’re right....rates have moved up significantly. I think it’s always hard to say precisely, but ... most people do a common decomposition of the increase, and ... the view will be, it’s not mostly about inflation expectations. It’s mostly about other things, you know—either term premium or real yields— and it’s hard to be precise about this. Of course, everyone’s got models that’ll give you a very precise answer, but they give you different answers. So—but, essentially, they’re, they’re moving up because—it’s not because of inflation. It’s because probably—it’ll probably have something to do with stronger growth, I would say—more, more supply of Treasuries. You know, the common explanations that you hear in the markets kind of make sense."