How the Markets Could Move On Jackson Hole
Today sees the start of one of the major annual economic events that could really shake up the markets. The Jackson Hole Symposium will run for three days, with the main event being tomorrow, when Fed Chair Jerome Powell gives his much anticipated speech in the middle of the New York trading session.
Markets are anticipating some kind of guidance about what will happen to interest rates in the near future. Even if specific guidance is not provided, the size of the event and expectations around it could still move the market, anyway. It’s expected to have global implications, thanks to the participation of other central bankers, such as the ECB’s President, Christine Lagarde. She will speak also on Friday, but after the markets close.
What to look out for
Last year, Powell gave what has been called a “shotgun” speech: A short and dramatic presentation that shocked the markets. He committed to raising rates to get inflation under control, regardless of the economic pain that might cause. That announcement was in keeping with the tradition of Jackson Hole being the scene for general shifts in policy.
Now, inflation has come down dramatically, the unemployment rate is below structural level, and the economy is still growing, contrary to expectations. Even though inflation isn’t fully down to target yet, it’s close. There is a strong consensus among economists that it takes several months for the full effect of interest rate policy to be seen in the economy. This supports the theory that inflation will keep coming down even if the Fed moves to keep rates steady, as the effects of prior tightening take hold.
Time to announce mission accomplished?
The markets are relatively certain that the Fed is at the end of its rate hiking cycle. The vast majority of traders expect no rate hike in September, and a majority expect no rate hike thereafter. The Fed’s position has been still that one more rate hike might be necessary.
The anticipation in the markets is that this could be an opportunity for Powell to announce that the hiking cycle is done, and now it’s time to wait and see. Some have gone so far as to suggest that Powell could provide hints that the Fed might consider cutting rates in the medium to long term due to the economic situation. A suggestion that rates have topped out for now – though likely couched in conditionalities around the data – might offer a relief valve for the markets. It could hurt the dollar, but open the flood gates on risk appetite.
Is it too soon?
After the last rate hike in July, inflation data came in better than expected. Jobs creation also slowed down. Earnings reports were generally positive. But, there is another round of labor and price data coming out before the next time the Fed meets.
That opens the possibility that Powell will stay the course, and repeat the rhetoric of closely monitoring the data, with additional hikes potentially necessary. While this might support the dollar at the expense of other currencies, particularly the yen, it will likely decrease interest in taking on risk. Safe havens could be the biggest beneficiaries of this potential outcome.