There are strong expectations that the US Federal Reserve’s Chair Jerome Powell will give clues about inflation and interest rate trajectory at the economic symposium at Jackson Hole, Wyoming, on Friday.
However, it is not imperative for the Fed to speak in alignment with the market’s expectations. A hawkish surprise from the Fed could potentially upset the market.
Reuters quoted analysts at Bank of America believe markets may be ill-prepared for a hawkish message from Powell. They pointed out that the recent strong US economic data might make policymakers more worried about inflation rising again.
“Fading expectations of recession have brought the focus back to inflation and a tight Fed. We think equities are more at risk of a macro-driven shock than the market is pricing in,” Reuters quoted Bank of America saying so.
War on inflation not over
It has been over a year since the US Fed began one of the most aggressive wars against inflation in recent history. The US Fed has been raising interest rates since March 2022 with the aim of bringing inflation down to its 2 per cent target level. The Fed raised rates for the 11th time since March 2022, to a range between 5.25 per cent and 5.5 per cent on July 26, the highest level in 22 years.
While the federal funds rate is high, the Fed is in no mood to stop here. In simple terms, more hikes are possible and if there is no hike, the rates will remain up for a longer period.
Powell is aware of the challenges that he has to deal with. While the US economy remains resilient, there are signs of stress in China and Europe which could have a spillover effect on the US. For now, it looks like Powell will focus more on how to keep inflation under control than how to support growth.
“Markets will watch out for his assessment of inflation durability below 2-2.5 per cent which would give a sense of the degree of pivot next year. While the Fed is inclining towards a ‘no landing’ scenario, Powell is cognizant of the macro imbalances in other key economies, namely Europe and China, and rising global geopolitical noises which could also have a spillover effect back in the US,” Madhavi Arora, Lead Economist at Emkay Global Financial Services told Mint.
What to expect from the US Fed?
While nobody knows what Powell will say today, his speech may have a hawkish tone. The Fed is expected to take into account the recent macroeconomic trends which show the US labour market remains tight and inflation still significantly above its 2 per cent target.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services underscored that the US economy is exhibiting strength with GDP growth around 2 per cent, consumer inflation at 3.2 per cent and unemployment at 3.5 per cent.
“The trends in these important indicators will be watched by the Fed and its message will be influenced by the latest data on these macros. The Fed is unlikely to sound dovish,” said Vijayakumar.
Deepak Jasani, Head of Retail Research, HDFC Securities pointed out that at the same gathering last August, Powell famously warned the US may need to enter a “lengthy period of very restrictive monetary policy” that will “bring some pain,” sending the market — long accustomed to a friendly Fed and lower interest rates — into a tizzy.
He feels the market may not be prepared for a hawkish Fed.
“Markets may be ill-prepared for a hawkish message from Powell. The recent strength in the US economy would probably increase policymakers’ concerns about a reacceleration in inflation. We, however, feel that Powell may take a noncommittal strategy and we may see a small relief reaction early next week,” said Jasani.
Vaibhav Shah, Fund Manager at Torus Oro PMS expects that the Fed may try to provide a trajectory on interest through their hawkish narrative.
“Incoming data over the past several months signals that the US economy is doing well in spite of record spree on rate hikes. Inflation recently has shown some signs of moderation and with the recent slowdown in China, at least commodities are expected to be soft in the near future. Food inflation and housing will be a concern mainly going forward which may take some time to reverse. Thus we think the Fed may wait for more conviction on the incoming data and may keep rates higher for longer before they finally decide to pivot from their stance,” said Shah.
Manish Chowdhury, Head of Research, StoxBox believes considering the recent interest rate trajectory, market participants are pretty confident that the interest rate hike cycle’s end is near. He said any longer period of elevated interest rate levels has the potential to push the world’s largest economy closer to recession and pour cold water on hopes of a soft landing.
“We will also keep a close eye on comments about the stubborn labour market and direction on when the service inflation is expected to cool which is posing an obstacle for a faster deceleration of the overall inflation,” said Chowdhury.
“Everyone believes that the Fed’s position on interest rates will remain the same throughout this year. However, Powell might offer some insights on what the bank might do with rates next year. We are expecting this speech would provide some direction on interest rates going forward,” said Shrey Jain, Founder and CEO of SAS Online.
Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
