While the full program of this year’s Jackson Hole symposium will be released tonight at 8pm ET, what we do know is that Chair Powell will address the symposium on Friday, August 23, at 10 AM ET.

Powell is widely expected to preface his prepared remarks with an update on current conditions that acknowledges continued risks from trade and global growth, similar to the July statement, however he may disappoint markets which are expecting a far more explicit commitment to future rate hikes.

Indeed, as noted earlier, following surprisingly hawkish comments from Philly Fed president Harker, Kansas City President Esther George and Boston Fed President Eric Rosengren, all of whom voiced their opposition to additional cuts, the market-implied odds of a 50bps rate cut in September has tumbled to just 2% as of this afternoon, down from 41% a week ago, resulting in yet another inversion in the 2s10s curve as 2Y Treasury yields spiked.

If anything, today’s hawkish tone was a reminder that it is premature to expect a signal on the size of the Fed’s September move something which the market desperately wants; In fact, as Morgan Stanley writes, Powell will certainly choose to maintain flexibility on size by reminding us the Fed “will act as appropriate to sustain the expansion.”

Furthermore, there’s been no gathering since the July FOMC, the few policymakers who have since spoken publicly have either been surprisingly hawkish, or have underscored that there is no pressing need to take additional action… and there’s still more data to get through ahead of the next meeting.

Key risks: As Morgan Stanley’s Ellen Zentner writes, watch for the use of “somewhat” when Powell is describing further adjustments. Investors may associate the word “somewhat” with 25bp. Acknowledgment that downside risks have increased with no characterization of “somewhat” could be taken as confirmation that it is likely the Fed makes a larger cut in September, although that now appears unlikely.

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Some More Details

Despite the Fed’s efforts to play down the spectacle that the Annual Economic Policy Symposium had become—first cutting out Wall Street’s attendance in 2014,and then Ben Bernanke’s absence in his final year as Chair and Chair Janet Yellen’s periodic absence—because the gathering in Jackson Hole, Wyoming was used several times by several central bank leaders to signal upcoming changes to monetary policy since the financial crisis it will forever be the punctuation mark of the summer.

And in the aftermath of the July 31 FOMC announcement, investor expectations once again appear to be high that Chair Powell could indeed deliver some signal of how the FOMC might be leaning ahead of its September 17-18 meeting when he

delivers prepared remarks on Friday, August 23at 10AM ET (8AM MT).

While some anticipate a further dovish relent by Powell, Morgan Stanley expects Powell to confirm the Committee’s easing bias (“act as appropriate”), but provide no definitive tilt towards a larger 50bp cut. Asa a result the chance for disappointment in Powell’s message is rising, enough though odds of a 50bps cut has been effectively extinguished after today’s barrage of hawkish comments from Jackson Hole participants.

That, however, does not mean we won’t get there, and a cut of that magnitude cannot be ruled out, but as Zentner writes, “Powell signaling it at Jackson Hole is highly unlikely.”

We had called for a 50bp cut at the July meeting; we were wrong. We had also warned if the Fed did not deliver it would erode market confidence and drag the Fed into possibly delivering more cuts than if it had not kept its powder dry when facing material downside risks to the outlook. And indeed, following the Fed’s underwhelming delivery, we pulled on an additional cut to the expected path for a total of 75bp in easing this year (see FOMC Outlook: More Cuts Are Coming, August 12,2019).

So what’s changed since the July FOMC meeting? For one, there’s been increased market volatility around an announcement of a new round of tariffs slated to go into effect September 1. That announcement came just one day following the July 31 FOMC statement and press conference in which Chair Powell noted that one of the positive developments was the Committee’s judgment that trade policy tensions appeared to have “returned to a simmer.”

The Committee has made clear, however, that it will not calibrate monetary policy around trade and the incoming data since the July FOMC meeting have been mixed. For example, two of the regional manufacturing surveys—the NY Fed’s Empire State survey and the Philadelphia Fed’s Business Outlook survey—remained strong on an ISMadjusted basis in August and together set early expectations that the August ISM will hold up well. The trend in weekly initial jobless claims has remained ultra-low, forward-looking indicators of housing activity have been strong—keying off the sharp drop in mortgage rates, as were job gains and retail sales.

To be sure, a sizable drop in consumer sentiment in the University of Michigan’s preliminary August reading is the only ominous data point that could portend weaker consumer spending ahead. The drop in consumer sentiment was very clearly driven by the announcement of further tariffs and to some extent the resulting stock market volatility, but it was also driven by the Fed’s July rate cut itself, which US households took as an indication that recession could be around the corner.

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And herein lies the rub: The results of the August survey highlighted the so-called “informational risk” from delivering the July rate cut. No doubt the FOMC debated this informational risk at its July meeting. In past cutting cycles the transcripts show this debate playing out—what kind of message is the Fed sending when it cuts rates? If it is an insurance cut, then they must deliver it with a positive tone that provides comfort. This would have been one of the reasons for pushback from the Committee on delivering a larger 50bp cut, or indeed delivering a cut at all. Indeed, Chair Powell’s Q&A was intended to convey optimism and comfort—i.e., only a small adjustment is needed; the US economy is mid-cycle.

Unfortunately, as the UMichigan narrative showed the delivery fell far short of providing a sense of comfort to financial markets, and US households took the fact that the Fed cut rates at all as ominous, to wit:

“The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession. Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession. Falling interest rates have long been associated with the start of recessions. Perhaps the most important remaining pillar of strength for consumer spending is favorable job and income prospects, although the August survey indicated some concerns about the future pace of income and job gains”

While the Committee has made clear that it will be contemplating both the “timing and size of future adjustments” to the policy rate, there’s simply not been enough data to convince the Committee broadly, at this early stage, that a larger cut is needed. That said, the escalation in trade policy and resulting downside risks is likely enough to at least get consensus around a follow-up 25bp cut at the September meeting.

Until today, we had heard from three of the voters since the July meeting. On August 2, Esther George, President of the Kansas City Fed and one of two dissents at the July meeting in favor of no cut, acknowledged risks to the outlook emanating from trade policy uncertainty and slowing global growth, but did not see it as necessary to cut rates given that the incoming data simply confirmed her expectation for the US economy to slow toward trend. On August 6 in a Fox Business interview, James Bullard, President of the St.Louis Fed, and one of the most vocal Fed doves, said it is too soon to determine what further action may be needed, citing the drop in interest rates this year that is still working its way positively through the economy (a view no doubt bolstered by the surge in refis this year). On August 19 in a Bloomberg interview, Eric Rosengren, President of the Boston Fed and the second dissenter at the July FOMC in favor of no cut, said, “We have to be careful not to ease too much when we don’t have significant problems…[I] don’t see a lot of need to take action” with rates right now.

Making matters even more complicated for the “dovish” Powell, all three regional Fed presidents who spoke today with CNBC’s Steve Liesman were especially hawkish.

As a result, it is unlikely that Chair Powell would have the appetite to box the Committee into action when there is still a proper debate to be had at the September meeting, nor would he need to, according to Morgan Stanley.

If Chair Powell is already convinced the consensus will vote to cut rates again at the September meeting, he need only deliver the neutral message which would keep market expectations high for action but retain more flexibility on the size.

Of course, if Powell wishes to, he can clearly set market expectations in his messaging:

One is to again employ the use of the word “somewhat” when describing further adjustments. This word was used several times by several policymakers leading up to the July FOMC meeting, such that now it is likely the market has determined the word “somewhat” to mean 25bp.

Alternatively, acknowledgment that downside risks have increased with no characterization of “somewhat,” could be taken as confirmation that it is indeed possible the Fed makes a larger cut in September.

Bottom line: the scope for disappointment from Powell’s speech is substantial in a market that until earlier this week was pricing in non-trivial odds of a 50bps rate cut three weeks from today. Furthermore, should Powell underscore that “mid-cycle adjustment” narrative, potentially putting a third rate cut in 2019 under question, that could hammer stocks which have now priced in as much as 4 rate cuts over the next 12 months.

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