Which Side Of The July Minutes Will Powell Take (If At All?) (2/2)

The relatively balanced July meeting Minutes captured much of the the current debate, and the crux of the market reaction will be whether Powell’s speech tilts one way or the other.

• “Most participants continued to see upside risks to inflation, which could require further tightening of monetary policy,” the minutes said. “A number of participants judged that, with the stance of monetary policy in restrictive territory, risks the achievement of Fed goals had become more two sided.” Fed officials cited “a number of tentative signs that inflation pressures could be abating” although several FOMC members also expressed concern that services inflation outside of housing was not yet showing signs of cooling. With more key data between now and the September FOMC meeting, there is little reason for Powell to show his hand now beyond the July Statement guidance that “in determining the extent of additional policy firming that may be appropriate to return inflation to 2%...”

In Powell’s words, versus the usual lengthy speech on big themes, 2022’s edition was “shorter, my focus narrower, and my message more direct." (2022’s was less than half the length of 2021’s 3000 word speech.) He cited three important lessons from "what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century": they are "central banks can and should take responsibility for delivering low and stable inflation"; "the public's expectations about future inflation can play an important role in setting the path of inflation over time"; and "we must keep at it [fighting inflation] until the job is done". Those could all be repeated again this time in one form or another.

• The market reaction to 2021’s keynote was relatively dovish after Powell was seen delivering calming tones: modest pace of tapering, hikes on hold, inflation transitory. 2022’s shortened edition was taken more hawkishly, and we would expect 2023’s speech to sound more along those lines than an academic treatise on r-star such as Powell delivered in 2018.
• Between FOMC commentary and strong incoming activity data, markets have already gotten the higher-for-longer message. Another hawkish Powell speech per 2022 should not be a surprise, therefore, and recent aggressive price action could mean markets may even take Powell’s message as leaning marginally dovish versus consensus. But overall we don’t expect him to deliver an outright dovish message.