Fed chair Powell performed roughly “as expected” at Jackson Hole on Friday. Lots of progress to date against inflation. Inflation is going down, but it remains elevated. The path forward is going to be data dependent and the Fed will hike if they need to hike. Everything in life is politics, including being the Fed chair in the post COVID world. Powell kept his options open just like a good politician does. I don’t think he wants to hike anymore but he’ll do it if the market gives him the chance. So far, the stock market’s reaction has been to shrug off his comments on potential hikes and pretty much focus on better times coming in 2024 when a small recession has occurred, earnings are improving, and the Fed is cutting rates.
The bond market has had a slightly different spin on Powell’s performance. Yields at the front end of the UST curve have gone a little higher. Odds of a Fed hike at the September meeting have gone from 11% to 21% but Vegas still betting September is a skip/pause. Odds have increased about the chances for a November hike, rising from 20% pre-Powell speech to 45% this morning. The market is also pricing in 30-40% chances of rate cuts come Spring 2024.
The path forward will all come down to the labor market. If labor/jobs weaken the next 2-3 mos I think the Fed is officially done and we’ll get a soft-landing recession in early 2024. Non-farm payroll readings <200,000 will do the trick on a more extended pause. If not, the Fed will hike in November and odds of a harder landing recession will grow exponentially.
In bowling, the toughest shot is the 7-10 split. Rear corner pins both need to fall to capture the split. Getting one pin down is easy, getting both down near impossible. Powell is trying to pull off a 7-10 split with regards to rates and policy. One more hike might be the solution or a new problem. I think he should be done on additional rate hikes but even Fed chairs throw gutter balls sometimes.
Future rate hike vs. rate cut odds this morning as priced in the UST market
Source: Bloomberg Finance LP and EISI as of August 29, 2023
Richard Barrett
Chief Investment Officer
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