Last week on the then upcoming Jackson Hole economic symposium, I wrote about how the market had been largely ignoring Powell’s guidance.

Like a row of suspended pendulums, each time the Fed would engage a hawkish move, the market would strike back in disbelief. And I wrote:

“Biden wants to spend more on woke and with mid-terms coming up in November is still highly motivated to eradicate >2% inflation, and that means Powell (who wants to keep his job) needs to keep tightening, at least for now.
Any sign of a pause will reignite demand.
I’m guessing Powell will most likely fall back to his stable prices and maximum employment mandates and continue with a hawkish tone preferring to avoid the subject (i.e., the September rate) and not wanting to cause another rally.”

Well, that’s pretty much what happened at Jackson Hole, except that unlike in previous years he gave away more that what I was expecting, including saying that the September increase would be “another large one”, presumably 75 basis points (which would take the FFR range to 3% to 3.25%), but as expected the size will depend on the “totality of incoming data and the evolving outlook”.

What he did confirm was that in his mind, the Fed will move the federal funds rate to restrictive policy territory, and that a pivot is a long ways down the dusty and most likely painful track.

He’s saying that while his Fed will be data dependent, the trajectory is up, the fix is in, employment might suffer and there will be some pain for businesses and households until he sees inflation back around the 2% goal. Oh, and no pivot (rate cuts). Simple. And there’s no doubt it’s what he believes and wants markets to respect.

The equities saloon took notice of the drifter shooting up the bar, with tech down over 4% and the overall market down around 3.5%.

But the bond market only moved +/- 4 basis points at each end of the curve. Perhaps bond investors still don’t believe Powell will be able to pull it off, even though he might be willing, or maybe it was that the spectre of a 100 basis point or higher hike was not invoked. We shall see.

Speaking about invocations, Powell did invoke Volcker during his ~8 minutes of civilised bar fighting to underscore his resolve to forcefully combat inflation, and here are my top 10 takeaways:

Restoring price stability is the Fed’s number one goal.
Objective is to destroy enough demand to anchor inflation back to the Fed’s long-range goal of around 2%.
Sees strong underlying momentum and a strong labour market but demand for workers is greater than the supply of available workers, and high inflation continues to spread.
July’s inflation low welcome but not enough for committee to be confident that inflation sustainably moving down.
It will take time to restore and bring demand and supply into balance and there are likely to be some softening of labour conditions in the meantime
Households and businesses will feel some pain, but failure to restore price stability would cause greater pain.
No stopping or pausing at the long-range neutral rate (which is where the federal funds rate currently ranges) and instead, Fed will move policy purposefully to a level that will be sufficiently restrictive to return inflation back to 2%.
An increase of 0.75% could be appropriate again but will depend on totality of incoming data and evolving outlook, and at some point in the future it would make sense to slow the pace of increases.
However, it’s likely that the Fed will need to maintain restrictive policy stance for some time.
Feeling an unconditional responsibility to restore price stability, Powell said he was committed to realigning aggregate demand (something he can control) with supply (not in his wheelhouse) and the Fed will keep at it until the job is done.

In the hour after his speech, US treasury yields at the short end of the curve, i.e., 2 months up to 5 year maturities increased by between 1 and 4 basis points and the mid to long end of the curve from 10 year to 30 year bonds maturities fell between 1 and 4 basis points. Curve inversion around the 7 year point continued, but ever so slightly.

And by the end of trading, the bond market finished up not too different from the above.

While equities participants panicked as they watched their saloon getting shot up, the bond market’s response was like a couple of tail flicks from a sleepy horse tied up outside the bank.

This is despite Powell’s guidance that he will keep at it until the job is done” and that he will inflict some pain on businesses and the consumer. Oh, and no pivot (rate cuts) anytime soon.

Granted, it’s guidance and not yet a reality, but it looks like the bond market is pricing in some optionality that Powell just won’t be able to get as far as he thinks.

We will see how bonds react over the next days and weeks as jobs reports, PMIs and other critical data points that will define the totality of his decision, ride into town.

For us down under where gas, iron ore and food produce is plentiful, the Aussie dollar is down as the USD wrecking ball gets bigger and heavier with more serious U.S. rate hikes contemplated. That makes the USD stronger against the Aussie and good for our USD denominated commodity exports, but not so good for imports in already challenged supply chain theatres.

But what’s probably not factored in yet is that as more restrictive monetary policy in the U.S. and Europe and the slowdowns in the UK and China weigh on global growth and aggregate demand, commodity price expectations are likely to weaken. If that happens, it will likely express itself in a weaker Aussie, subject to Lowe not mooning official rates. So, there could be a double whammy on the Aussie to the downside unless Lowe goes hard on rates.

Powell looked like a no-nonsense high plains drifter seeking to mete out pain and justice after years of monetary neglect (Fed neglect) and while he shot up the equities saloon, he stopped short of robbing the bond bank, and yields stopped short of mooning, for now.

Mike

Jackson Hole High plains drifter to forcefully combat inflation