Global Daily – Jackson Hole preview

by: Bill Diviney

Fed View: A dovish agenda could make for some dovish headlines – The Kansas Fed’s Jackson Hole Symposium begins this Thursday, with the most important event for markets being Fed Chair Powell’s speech on Friday – the text of which will be released at 16:00 CET. The topic for this year’s Symposium is the rather cryptic-sounding ‘Changing Market Structure and Implications for Monetary Policy’. In a press release, the Kansas Fed elaborated on the precise meaning of this, referring to the increasing power of multinationals and how this ‘may result in a decrease in competition within many industries’. It then goes on to link this to the declining labour share, weak productivity growth, and in turn, weak wage growth. At the same time, the ‘increasingly global marketplace (…) may limit the ability of firms to raise prices in response to rising demand’.

Should Chair Powell focus on this topic in his speech on Friday, it looks likely to be a dovish one, in our view. As we discussed in our recent report, Where is the wage growth?, there are many structural forces weighing on wage growth (and in turn inflation), and this is likely to limit how far the Fed needs to go in tightening monetary policy. However, while Chair Powell is likely to sound somewhat dovish in his longer term outlook for wages and inflation, we expect him also to return to a theme he emphasised in his June FOMC press conference – financial stability. Then, Powell pointed out that the previous two business cycles did not end because of high inflation, but because of financial instability (see here). He will likely use this to argue that it is prudent to continue to normalise monetary policy at a gradual pace – and to take rates towards neutral – even in the absence of excess inflationary pressure.

We continue to expect four more rate hikes by the Fed, taking the upper bound of the fed funds rate to 3.00% by next June – which would be close to the Fed’s median estimate of neutral (2.9%). Having for some time been above consensus, we are now below consensus in our expectation, according to the most recent Bloomberg survey, which now sees the Fed hiking a further five times. Financial markets meanwhile are almost fully priced for a September hike, but conviction further out remains tempered by uncertainty over trade policy, with a total of c.63bp of the 100bp in tightening that we expect priced in to next June. (Bill Diviney)