UBS: Powell Could Favor 50bp Sept Hike, But Point To High Terminal Rate

UBS thinks Fed Chair Powell may use his speech at Jackson Hole in part to "defend the institution's policy response to the pandemic".

• Current policy-wise, he may reiterate that - addressing the symposium's theme of "reassessing constraints on the economy and policy" - the FOMC needs to bring inflation back to 2% "even if the labor market must slow and growth runs below potential, in order to achieve better economic outcomes in the long run".
• If Powell does signal intentions for the September FOMC, "we think he will favor 50 bp, at least gently, without removing the possibility of a 75bp increment."
• UBS' core view is for a 50bp September raise; they point out though that Powell "will likely argue that this lower pace of hikes does not imply a capitulation on inflation but a move to further ongoing toughening. This could still be meaning fully restrictive policy but at a pace that allows for more evaluation of how inflation and the real economy respond. At this juncture Chair Powell likely won't want to ease financial conditions and could use the opportunity to suggest the terminal rate is higher than expectations."