The Kansas City Federal Reserve will host this week (August 25-27) in the Grand Teton National Park the traditional annual economic symposium in Jackson Holewhich this year will be titled ‘Reassessing Constraints on the Economy and Policy’.
This year’s symposium marks the first conference in person since 2019, following the pandemic forced the 2020 and 2021 editions to be held telematically. In addition, the highlight of the conference, Fed Chairman Jerome Powell’s speech on Friday (4:00 p.m. Spanish time) will be broadcast live for the first time. In any case, it will be one of the last opportunities for the market to decipher the future direction of monetary policy before the Fed meeting next month (September 21). The market is torn between a 50 basis point rise in interest rates or a more aggressive 75 point rise.
As pointed out by Investment Strategies Araceli Fruits, from Araceli Fruits EAFI, the president of the Federal Reserve, Jerome Powell, “predictably will give us additional clues regarding what the pace of interest rate hikes will be like for the month of September”. In recent weeks, macro references such as the CPI easing or the strength of the labor market have led the market to go into “slowdown mode” in the pace of rate hikes, discounting a rise of 50 basis points by more than 60% in the market .
However, the expert recalls that “Powell is putting his prestige at risk” in the fight once morest inflation that is still high, so in Frutos’ opinion “possibly in September there will be a 75 basis point” increase.
“The positive surprise of the CPI for July (+8.5% in July) and the softer tone of the latest Minutes have moderated expectations of future increases”, they agree Bankinter analysts in a report, “but we believe that the Fed will still show a rather hawkish stance (hard) because the US macro is holding up better than expected, especially employment, and inflation is still far from the target”.
“The Fed will try to cool down the expectations of a perhaps complacent market, which hinders the transmission mechanisms of its monetary policy. It is striking that several members (Kashkari, Evans, Daly or Bullard) have recently reiterated the need to defuse the price escalation through further increases, which might put fed funds at 4% or higher by the end of 2023.
But the truth is that the degree of uncertainty is very high. In a note to clients on Friday, Andrew Hunter, Senior US Economist at Capital Economicswrote that recent economic events are likely setting the table for a 0.50% rate hike in September.
“To the extent that these events cancel each other out, we continue to expect the Fed to raise rates by 50 [puntos básicos] next month,” Hunter wrote. “There doesn’t seem to be much need for Chairman Jerome Powell to adjust expectations when he speaks in Jackson Hole next Friday.”
How can the market react?
The truth is that the climate of uncertainty contributes to the market paying special attention to Powell’s announcements this year. The markets in general, and Wall Street in particular, have become a real roller coaster this yearslipping from record highs in November 2021 into a deep bear market on fears that central banks’ battle once morest inflation will spark a global recession.
In recent weeks, hopes that the Fed would slow to 50 basis points had fueled a rebound in stocks, but investors slowly seem to be thinking they may have been too optimistic. This year, for the moment, Wall Street has started the week with the alarms on, with falls in the S&P 500 on Monday of around 1%.
Jackson Hole is traditionally held in the last week of August and the experience of other years shows that it is usually a motor of Wall Street, to one side or the other. Last year, for example, the S&P 500 closed the week of the symposium up 1.5%. Even more positive was 2020, with a 3.2% rise in the week for the New York index, which also recorded a full rise.
However, in 2019, the last year before the pandemic, the week of Jackson Hole closed with a 1.4% decline for the S&P 500 following Friday alone saw falls of 2.60%.
