Jackson Hole - Powell releases inner dove, Trump releases threat
Powell gave his final annual speech at Jackson Hole last Friday. The chair’s annual speech has often been used to signal policy shifts, and this year was no different. So let us start with the bombshell statement in the speech: 'The stability of the unemployment rate and other labour market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.'
Markets immediately priced this in a full 25 bps cut in September. Indeed, 'may warrant adjusting' suggests they will cut in the near term, while the 'proceed carefully' rules out a 50bps cut. Still, the remainder of the speech was a lot more nuanced. He noted that the labour market appears to be in balance, but a 'curious balance,' with demand and supply both slowing. This would imply higher downside risk than a balance with strong demand and supply growth. On inflation, he repeated that he sees transitory inflation as a reasonable base case for the tariff induced inflation, but also says that 'one-time' does not imply 'at-once,' and that it will take more time for inflation to feed through. He added that 'Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.'
It is somewhat surprising that Powell would make such a strong statement as the quote above. Expectations were for Powell to deliver a balanced and neutral speech, while this statement is relatively dovish, especially in isolation. 0It comes against the backdrop market pricing leaving all options on the table, and various other voting members voicing their concerns in recent days about inflation, including Collins, Goolsbee and Schmid.
With regards to the policy framework review, as expected, average inflation targeting, which allowed the Fed to target average inflation of 2% over an unspecified period of time, was axed in favour of a clear 2% inflation goal. Additional changes to the language include the removal of the wording that says the fed would only respond to ' shortfalls' of maximum employment. It now says that employment may run above 'real-time assessments of maximum employment' without necessarily creating risks to price stability, acknowledging the difficulty in real-time assessment of that figure. The next review will occur again in five years.
While Powell was making his speech, Trump told reporters that he'll fire Fed governor Lisa Cook if she doesn't resign. Cook is accused of mortgage-fraud, after which Trump called for her resignation. Cook stated she would not be bullied into stepping down. Similar to Powell, Cook can only be fired 'for cause.' There is no president and it is unclear what would constitute cause. She'd remain in office until any legal battle is fought.
Overall, Powell opened the door for a September rate cut with similar clarity to last year. This has given the FOMC little room to back out of cutting. Still, it is clear that there is no true consensus on the FOMC, and the remaining data points will prove vital in the ultimate outcome. These datapoints include the labour market report on September 5th, the annual NFP benchmark revision on September 9th, and August CPI inflation on September 11th. Note that the Fed blackout period starts on the 6th, and another bombshell Wall Street Journal publication during that period may once again lead to large swings in rate cut odds. We will update our Fed view when all relevant data is available.