In his preview of the upcoming one-two punch of Fed Chair and Vice Chair speeches today and tomorrow, Deutsche Bank economist Matthew Luzzetti writes that around the turn of 2018 there was a tangible hawkish pivot in the Fed’s narrative. The genesis of this shift was the emergence of several tailwinds for US growth that had previously been headwinds, including domestic fiscal stimulus, accommodative financial conditions and a stronger foreign growth impulse. As a result of these developments, the central Fed narrative became that monetary policy had to be moved to at least a neutral setting and that a restrictive stance was likely to be needed at some point.

However, recent comments from Fed leadership have raised doubts about pieces of this narrative, as some of these tailwinds may be transitioning back to headwinds. So far Luzzetti has interpreted these comments as reinforcing the baseline expectation of lifting the fed funds rate to neutral before considering whether to pause, while highlighting downside risks to rate hikes beyond neutral.

This week’s Fedspeak, namely Powell, Williams and Clarida's speeches, should help clarify whether the Fed's narrative has reached a turning point.

With this backdrop, this week’s Fedspeak – namely Clarida's speech on "Data dependence and US monetary policy" at 8:30am today; Powell's speech on "The Federal Reserve's framework for monitoring financial stability" on Wednesday; and Williams' speech on global economic issues on Friday – should help clarify whether the Fed's narrative has reached a turning point.

Below are four key points to watch in these speeches, with Clarida due in just a few minutes.

1. Get back to neutral? Lost in Powell and Clarida’s comments a few weeks back was that both officials reaffirmed the plan to get back to neutral. Given a labor market beyond full employment, inflation at target and growth expected to remain above potential, both officials are expected to once again reiterate this expectation. A reaffirmation of this view would support the interpretation that the market has been too aggressive in pricing out rate hikes next year.

Where is neutral? Fed leadership should continue to reference the median projections from the Summary of Economic Projections (3%), which would be consistent with three more rate hikes, including the likely increase at the December FOMC meeting. But with Powell emphasizing that neutral is highly uncertain, watch for any signs that Fed leadership may interpret recent market developments and the slowing of growth in interest rate sensitive sectors, namely housing and capex, as evidence that neutral could be lower than they previously thought.

2. Financial conditions still accommodative? Despite the tightening of financial conditions since early October, Fed officials have continued to describe financial conditions as accommodative. Deutsche Bank's FCI suggests that this description could be downgraded to neutral, though the Chicago Fed FCI, which has been referenced by some Fed officials including Brainard in her aforementioned speech, remains in accommodative territory. A downgrade to the Fed’s view on financial conditions should primarily reflect less need to move to a restrictive stance, rather than weaken the argument for getting to neutral. However, this tightening could also lead to a softer baseline growth outlook and greater downside risks that could undermine the argument for a few more hikes before pausing.

3. How worrying is slowing global growth? At the center of the market’s reassessment of the Fed’s hiking path in recent weeks appeared to be the acknowledgment from both Powell and Clarida that global growth was slowing and becoming more of a headwind for US prospects. A weaker foreign growth impulse could directly soften the US growth outlook via less demand for US goods and could indirectly impact the Fed’s assessment of the outlook by boosting the dollar as the market prices out monetary policy tightening by other central banks. Over the past few weeks there has been additional corroborating evidence from the European PMIs that growth indicators outside the US have indeed softened. While Fed officials are expected to continue to flag these developments as presenting a headwind to US growth, this should be considered in terms of the Fed’s constant assessment of the risks to their outlook. Weaker growth outside the US and the stronger dollar that is likely to accompany it should limit upside risks to US growth and help mitigate overheating concerns. However, Deutsche does not expect these developments to override the solid signal from domestic demand conditions that at least a neutral monetary stance is warranted.

4. Is confidence in on-target inflation wavering? After hitting the Fed’s target, measures of core inflation have softened over the past few months, with the core CPI recently slipping to levels below which are consistent with the Fed’s target. Moreover, the rolling over in health care PPI inflation portends some weakness in the corresponding component in the PCE price index, a development which, if it were to occur, would reverse the rise in health care inflation over the past two years that was critical to the Fed achieving its inflation target. The potential emergence of softer inflation pressures has been the most compelling reason for the Fed to sound less convinced about having to march directly to a restrictive stance. Fed officials have so far not wavered in their assessment that measures of trend inflation remain close to target, and it is likely too early for any change in this assessment in this week’s Fedspeak, particularly given the still supportive signal from strong domestic demand. But it bears close watching, especially from those officials (e.g., Brainard and particularly Evans) who previously worried about too low inflation but who pivoted in a more hawkish direction as it became clear inflation was returning to target.