Could Powell’s speech reshape rate-hike outlook before blackout period?

Before the Economic Club of New York, Fed Chairman Jerome Powell is scheduled to deliver prepared remarks that are anticipated to increase market volatility and offer crucial details on the Fed’s upcoming policy move. The speech will likely be closely watched by the markets because it will be delivered just before the Fed’s blackout period starts on Saturday.

Following the September policy meeting, the Fed made the anticipated decision to maintain the policy rate at 5.25% to 5.5%. However, since the September policy announcements, changes in market dynamics and the release of macroeconomic data have made it challenging for investors to determine the Fed’s next course of action.

Bond prices fell in late September and early October as worries about a downgrade in the US debt rating and stagnant budget talks grew. The 10-year US Treasury bond yield, which is the industry standard, increased from 4.5% to almost 4.9%, marking its highest level since 2007. The rise in yields was viewed by a number of Fed policymakers as a development that might allow the US central bank to maintain its policy rate for the remainder of the year.

Philadelphia Fed President Patrick Harker said that tighter market conditions were “akin to rate hikes in impact,” while San Francisco Fed President May Daly argued that tight bond yields could be “the equivalent of another rate hike.” Fed Governor Christopher Waller noted that financial markets are tightening, which attracted dovish Fed bets and the CME Group FedWatch Tool’s probability of a no change in the policy rate this year rose above 70%.

Recent macroeconomic data releases from the US highlighted the resilience of the economy and the stubbornness of inflation, causing investors to second guess themselves about the rate outlook. In this scenario, the USD could come under heavy selling pressure, with bond yields making a sharp downward correction.

Alternatively, Powell could deliver a hawkish message by reiterating the need to raise the interest rate one more time, citing the lack of progress in inflation and the strength of the US economy. Investors may wait until the October jobs report data to take position.

The debate whether higher rates are required appears to have been settled at least for the November meeting due to the bear steepening of the Treasury curve. If Fed chair Powell surprises tomorrow and calls the meeting ‘live’, the dollar may struggle to pursue its advance.