Why Powell is likely to take a hawkish stance at Jackson Hole

Jerome Powell is going to have to correct market expectations from the last Fed meeting in July. In July’s meeting, the Fed recognised that some ‘recent indicators of spending and production have softened’. This was enough for some to say, ‘The Fed has taken a dovish shift’. There was then a run in equities, a drop in the USD, and a drop in yields as markets looked for a ‘dovish pivot’. Jerome Powell is likely to correct this perception with a more hawkish stance next week.

The mixed data since the last Fed meeting

There has been a very strong jobs print way above market expectations, a big miss in the NY Empire Manufacturing print, a beat in Manufacturing and services ISM, core inflation dropped more than expected at 5.9% y/y vs 6.1% forecast, consumer expectation in the Univ of Michigan survey beat expectations, but house sales are falling more sharply than minimum expectations.

All the mixed recent US data has meant the picture is really unclear for the US economy. So, there has not been a conviction in any run higher in risk assets since the picture is so mixed. This has been a very tricky market to trade; check this recent article outlining what approach to take in this kind of market.

Lessons from history

Jerome Powell will want to avoid the mistake of going ‘soft’ on inflation. This softly, softly approach led to Volcker in the 1980s having to come in and take interest rates up to 20% and unemployment to 10%. This is common knowledge and in living memory, so Jerome Powell is likely to tell markets we are hiking until the job is done. It is reasonable to expect a hawkish stance from Powell this week.

Therefore, be very cautious of being long on equities into the meeting as Powell could easily send the recent rally in stocks sharply lower by reminding markets that he is going to be hiking rates until inflation falls back down.

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