Powell’s Jackson Hole Speech, What Can Be Expected

Noticeably, traders, investors and economists have spent much of this week anticipating Jackson Hole Symposium which has now officially begun. Of course, markets are all waiting for the remarks by Fed Jay Powell which come at 10 o’clock tomorrow morning, Eastern Time.

Markets have got some economic data that come along the way, but nobody can be sure how much the scheduled data can tell about the future performance of traded assets.

On Friday, the core PCE which be released. This is Fed’s favourite inflation measure, the personal consumption expenditures index, and it is due out at 8:30 ET (12:30 GMT). Analysts expect core PCE to rise 4.7% from last year and 0.3% from the prior month.

When markets last saw the PCE, inflation was accelerating, not decelerating. And that was bad news. This is Fed’s preferred measure. Tomorrow is really important if the US sees another round of very solid inflation, so economists, under such a scenario, expect Powell’s speech to be more hawkish and accordingly a big rate hike in September.

Bloomberg expects Powell to be ready with a change of the speech and especially because the PCE data comes out just half an hour before the speech, However, there are lots of options to pick according to the significance of the awaited data.

At the top line, gasoline prices are relatively dropping and that is good news, but core inflation was unchanged. The shelter index, which some economists focus on because it’s a third of the CPI, was up and there is no sign of abating or turning down. So, another no less than 75 basis points interest rate hike is more likely during September FOMC meeting.

Most economists expect Jerome Powell to express insistence to continue to tighten financial conditions until inflation declines on a sustained basis two or three months. There is a game of chicken between the market and the Fed, but the Fed cannot afford to lose the game, because losing would harm Fed’s credibility. In fighting inflation, the US economy is trying also to maintain reasonable monetary authority and needs to provide as much protection for price stability to get sustained high employment and economic growth.

Powell has got a big job in front of him. Can America get price stability without positive real rates? Most people have got used to low nominal rates and they are not doing the inflation adjusted arithmetic and so, markets are not close to neutral at the moment.