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What to Watch Out For in Powell Testimony

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What to Watch Out For in Powell Testimony
Markets are on tenterhooks for two major events in the US over the next few days. One of them is a slow-rolling affair that could suddenly jolt the markets if something unexpected happens. The other is on a fixed schedule, and the markets can have some time to prepare. The chances of a huge surprise aren’t all that high, but it’s good to know what’s going on.

Later today and tomorrow, Fed Chair Jerome Powell will give his twice-annual testimony before Congress. Usually, he sticks to the script and there isn’t any big change. But, with markets still unsure when easing will come, his comments will get extra scrutiny. And what can throw things off script is that he must answer questions from members of Congress, and that might elicit some comments that could send speculation running wild. Particularly ahead of the CPI release later in the week.

What Powell Is Supposed to Say

The expectation is that Powell Testimony will stick to his script that he has maintained since the last FOMC meeting. He recently made a presentation at the ECB Banking Conference in Sintra, Portugal, and the thought is that his testimony in front of Congress will be essentially the same. At the time, the market was really worried about the possibility that there wouldn’t be a rate cut this year, and Powell’s comments helped soothe nerves.

Now that we’ve had the NFP data showing that although hiring remained robust, the labor market loosened once again. Wage pressure is slowing, which has seemingly confirmed to investors that the September rate cut is a go. Where there is more debate is what happens after that, but the market is fully pricing in one rate cut in the third quarter.

Flipping the Script

That means the situation is reversed for Powell, compared to the last time he gave his speech. With the market more inclined to dovishness, his comments are at a higher risk of being interpreted as hawkish. So, let’s see what he said last time and where it could be subject to a new interpretation by the markets.

Powell essentially repeated his post-rate decision presser, saying that progress has been achieved but more data is needed to provide an accurate picture of the economy. The important phrase was saying that the US is on a “disinflationary path”. That’s because the Fed is expected to cut rates if inflation is on the right path, even before it reaches the target.

Market Reactions

No one expects Powell to outright say that policy will change on a specific date. The “wait for more data” line is largely what the market would expect to imply that rate cuts are coming soon, because the data has been pointing in that direction. Powell explicitly referenced the last two inflation readings saying they were in the right direction.

Since then, the labor data has come out. If Powell’s focus is more on the labor situation than inflation, then markets could interpret the Fed’s position as more hawkish. That’s because wage-driven inflation is seen as the last obstacle before easing can start. So, if the Fed is still worried about that despite the unemployment rate popping above 4.0%, the market could start thinking that the rate cut will happen later than sooner. That would provide risk of the dollar gaining strength.

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