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🎙Uncle Powell: Reasons for Surprise💰

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As Uncle Powell speaks at Jackson Hole today, investors will be bracing for a rough ride. He will likely reiterate the commitment to fight inflation even as the latest CPI data showed the annual rate falling to 8.5% from a peak of 9.1% just a month ago. Inflation is still too high compared to the Fed’s target of 2%.

He will likely reaffirm his stance that the FOMC has to see continuous cooling off in prices. Yet, there are possible reasons for Uncle Powell to sound a tiny bit dovish.

🛎#1: The JH Symposium: Big Annoucement🔋

There is no doubt that the event has always been a platform for a significant announcement. Two years ago, we saw the Fed’s new inflation framework supports a potential overshoot of the inflation target after a long period of low inflation.

💡#2: Consistent interpretation of message has been the key🧰

While some economists had warned that the message was somewhat not conveyed in the right tone and predicted that the FOMC minutes would have a more aggressive hawkish tone, it turned out not to be the case.

It is reasonable for us to assume that the since the Fed officials had not to tap on July’s minutes to re-align the market’s expectation, Uncle Powell may avoid pricking that nerve during his coming speech. Instead, he will likely reinforce the need to review incoming data, focusing on August CPI data and job reports before the next FOMC meeting.

🍄#3: Markets should consider the Balance Sheet Reduction✂️

Another possible reason for more dovish is that the Fed is about to go into full force for tightening its balance sheet. The effect is unpredictable and will become more potent in September as the tightening is heightened. This may be a strong force in reducing economic demand.

With that, such a quiet giant movement may be sufficient for the Fed to be less aggressive on the rate hike to achieve the ultimate aim of reducing economic demand.

Regardless of all predictions and analysis, the flip side could be true if Uncle Powell spoke about a more restrictive policy stance for extended periods. Unfortunately, the market isn’t ready for such a message.

The last policy meeting was somewhat dovish. During the press conference, Uncle Powell spelt out a dovish tone despite raising the rate by 0.75% during its July meeting. He pointed out that future rate hikes could moderate as he saw a slowing economic demand given that the recent aggressive rate increment has been out of a normal cycle.