![]() ![]() Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point - its biggest hike since 1994 - to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year. Price pressures have continued to build for months, forcing the Fed to ramp up its tightening of financial conditions in an attempt to cool demand while hoping that some supply chain issues begin to untangle this year. Senate Banking Committee that the Fed was not trying to provoke a recession but that one was "certainly a possibility," with recent global events, specifically the Ukraine war and COVID-19 pandemic, making it more difficult to tame inflation without inducing a downturn. "Moreover, informing investors the Fed will keep rates very, very low for a very, very long time isn't 'news' to a market pricing in nothing for several years.On Wednesday, Powell told the U.S. "The history of Jackson Hole as the forum to roll out transitions in monetary policy is hard to ignore and expectations are in place for a grand reveal making the prospects of disappointment also a concerning eventuality should Jay choose to play this one close to the vest," he added. Ian Lyngen, head of rates strategy at BMO Capital Markets, wrote that "while it might prove to be a historic day for monetary policy as the Chair could ready the market for a new Fed framework for addressing inflation (or the lack thereof), the response in the Treasury market may be more benign." Krishna Guha, vice chairman of Evercore ISI and leader of its central-bank strategy, wrote that he expects Powell's address to "tee up a profoundly consequential and risk-friendly move to soft inflation averaging at the Fed's upcoming September meeting." Guha and his team expect the Fed to "seek a moderate inflation overshoot during the recovery phase of this cycle" as a way to avert "Japanification," or an extended period of low growth marked by weak inflation. ![]() Market strategists said that they expect Powell's speech to be one of the most impactful in recent memory and mark a fundamental change in the way the central bank treats inflation. Markets overtime had become convinced that the Fed was biased on the hawkish side." - Thomas Franck But they haven't convinced markets of it. They always acted like this was their goal. "I think the Fed has always had this as an operating goal. "I might be going against the grain of some other people… I really don't think this is a very big change to what the Fed's goals are nor the way they will actually operate," he wrote. Others, like Wilmington Trust Chief Economist Luke Tilley, said he's not so sure the Fed made a material change to its policy stance based on Powell's speech. "Now, however, the committee has explicitly indicated that 'following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.' Intentionally targeting an overshoot, even if only temporarily, is new for the Fed," Winograd added. ![]() "In the past, the Fed has let bygones be bygones-if inflation was below target for a period of time, the committee did not take that into account when formulating monetary policy, aiming only to return inflation to 2%," he wrote. ![]() Market strategists and economists were split on the extent to which the Fed and Chairman Jerome Powell actually changed the central bank's strategy.Įric Winograd, AB's senior economist, said that Powell's speech marked a "subtle but meaningful" change in the Fed's tact. ![]()
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