Powell set to outline Fed policy as speculation, expectations intensify

Against a backdrop of rallying stocks and climbing bond yields, Federal Reserve Chairman Jerome Powell this week will give one of the most closely watched speeches of his roughly four-and-a-half years as head of the central bank.

Although the address, scheduled for Aug. 26 at the Fed's Jackson Hole symposium in Wyoming, will likely be light on specifics, many analysts expect Powell to give a rough outline of the central bank's policy direction going forward. The event comes at a time of almost unprecedented turmoil in global markets, with inflation reaching highs not seen since the early 1980s, energy prices at near-record levels and many indicators pointing toward a recession even as unemployment remains low.

The speech will also mark a crossroad for the Fed, as central bankers have followed two-years of ultra-loose monetary policy in response to the pandemic with the most aggressive interest rate hikes in 40 years.

"It's clear that the Fed doesn't have a set roadmap and is letting the data guide their actions," said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research. "Consequently, [Powell's speech is] likely to be vague enough to be interpreted any way one wants."

Disappointment for bulls

Still, analysts believe that Powell plans to counter talk of tempering interest rates, pushing his message that central bankers are dug in until runaway inflation is brought under control. Although equity markets have rallied on expectations that the cycle of rising interest rates could be ending, Powell is unlikely to provide further fodder for bullish investors.

"Chairman Powell's job Friday is to realign market expectations with the Federal Reserve forecast," said Michael O'Rourke, chief market strategist at JonesTrading. "It is not the chairman's job to calm markets that have been overzealous in their expectations, it is the chairman's job to steer those expectations in the correct direction."

Since March, the Fed has boosted its benchmark federal funds rate by 225 points. In recent weeks, stocks have seen gains as investors hope that inflation may have peaked and the hawkish turn could be nearing its end.

Since the start of the year, equity indexes have seen sizable drops: the Nasdaq composite index fell nearly 32% through mid-June and the S&P 500 lost more than 23% from its all-time high in early January. But from mid-June to Aug. 22, these indexes have started to recover: the Nasdaq and the Russell 2000 were both up more than 16% over that time, while the S&P 500 rose almost 13% during that period.

Similarly, bond yields, which move opposite bond prices, began to climb, with the benchmark 10-year Treasury yield topping 3% on Aug. 22, up 151 basis points since the end of 2021.

Powell is unlikely to address recent volatility in the market; the chairman has been adamant that monetary policy will be determined by inflation and employment data going forward, not the hopes and expectations of investors.

That echoes comments this month from other central bankers, including Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, and Mary Daly, president of the Federal Reserve Bank of San Francisco, who have both warned that the Fed has a lot more work to do to combat inflation.

Another 75 points

"Given the trends with food prices and risk to energy costs, Powell will reinforce the Fed's hawkish stance at Jackson Hole," said Edward Moya, a senior market analyst with OANDA. "He will push back any idea of a September pivot and try to drive home the point [that even] when they are done hiking ... rates may have to remain elevated."

Most traders believe that the Fed will announce another 75 basis-point raise at its September meeting, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. The Fed raised rates 75 points at its July meeting.