Jackson Hole Preview: Will Powell help shift rate outlook?

Just one year ago it was the Jerome Powell that sent markets into a spin, when he utilised his Jackson Hole appearance to warn markets that the Federal Reserve would take the steps needed to drive down inflation in spite of the economic pain it may inflict. Twelve months later, and he has stuck to his word, with headline rates up from 2.50% to 5.50% in that period. Fortunately the negative impact of that monetary policy tightening has been minimal, with unemployment remaining low, consumption strong, and any recession held off for now. However, with central bankers and top economists gathering once again this week, traders will be well aware of the type of market shifting commentary that could be impending.

Kicking off on Thursday 24^th, this summit is likely to see participants hold a somewhat cautious tone despite the partial success of driving down inflation from its peak. Inflation appears to have turned a corner across the board, and significant steps have been taken to ensure CPI moves back down towards target. However, the strength of consumption has meant that it will take longer than many had expected to get back to normality. Retail sales data signals a willingness to pay more for less, with elevated wage growth helping to fuel that inflationary pattern. House prices are showing tentative signs of weakness, but it will likely take longer for mortgage costs to adjust upwards, lifting costs for homeowners and renters alike. With savings having been depleted, and higher housing costs filtering through thanks to increased interest rate, we are yet to see any particularly substantial downturn in consumption. The diminished savings highlighted by the San Fran Fed below does signal the potential for people to draw the line on what they are willing to pay for goods and services.

Central bankers have been left in a tough position, with the disparity between headline and core inflation signalling the fact that the heavy lifting has been largely undertaken by volatile elements largely outside of the control of interest rates (food/energy). Until core CPI heads lower, there is an argument that the higher rates have only had limited success in denting inflation.

Fridays appearance from Jerome Powell provides the main event of the meeting, with markets keen to gauge the pathway for US monetary policy going forward. The obvious area for grater clarity comes from the outlook for prospective future rate cuts. Markets currently price in a first move to ease rates in May 2024, cutting back from the current Fed Funds rate of 5.50%. The June dot plot from the FOMC signalled an expectation that we would see another rate hike by year-end, with rates back down to 4.5% by the end of 2024.

Firstly markets do not expect to see another hike this year. Secondly, there is a growing feeling that interest rates may need to remain elevated for longer thanks to sticky core elements and a strong economy. That economic resilience does make it more difficult to drive down inflation towards target.

With that in mind, all eyes will be on Powell over any clues over whether we will see another 2023 hike, and quite how long rates will have to remain elevated. The prospect of a longer period of higher rates could potentially help drive dollar strength. Will the Fed be willing to stick out their tightening phase until either the economy breaks or inflation drops to 2%?

Data dependence remains key for central banks moving forward, with energy prices providing the joker in the pack that could always bring a potential spike in inflation to disrupt any plans to loosen monetary policy. Nonetheless, until we see core inflation heading lower, the Federal Reserve will likely remain steadfast in their approach.

US Dollar technical analysis

The dollar index has been on the rise of late, fuelled by haven demand as equities suffer. That has taken the index back up into trendline resistance, with price struggling to break higher thus far. The wider trend remains bearish, signalling the potential for a reversal before long. However, a move up through 104.24 would bring about a wider bullish reversal signal. A move through 103.34 would bring greater confidence that we could see another burst up towards that key resistance level.