Dom’s Quick Take: Powell’s JH Speech Supports More Rate Hikes in 2023-24

Markets are currently pricing a two-thirds risk of the FFR rising 25bp by the November FOMC meeting and 100bp of cuts in 2024.

I expect a November hike and three hikes in 2024, starting in June.  Chair Jerome Powell’s Jackson Hole speech added to my conviction because it showed growing concerns over strong GDP growth. I expect above-trend GDP growth to persist due to loose fiscal and monetary policies as well as a stable household savings rate (Chart 11 in Cleveland President Mester’s speech). 

Before the Fed gets to hiking in mid-2024, I expect it will take out the 100bp of cuts for 2024 currently shown in the SEP. After hawkish comments from Powell and Mester at JH, I expect the Fed to start taking out the 2024 cuts at the September 2023 SEP (Table 2 in Fed Monitor: Fast Growth Becomes a Fed Concern). 

Overall, Powell’s JH speech was more hawkish than his July presser and much more hawkish than NY Fed President Williams’ August NY Times interview.

What was not new in Powell’s JH speech:

• Commitment to the 2% target, despite academic calls for a higher target.
• Disinflation has much further go, and progress will require continued tight policy.
• Continued strong growth could require additional policy tightening.

What was new:

• Less confidence that policy is restrictive enough. At the July presser, Powell said: ‘If you take the nominal federal funds rate, subtract the mainstream estimate of near-term inflation expectations, you get a real federal funds rate that is well above most estimates of the longer-term neutral rate. So I would say, monetary policy is restrictive.’  At JH, he said: ‘we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.’
• More concerns about growth acceleration. At the July presser, Powell said: ‘The overall resilience of the economy overall, that’s a good thing.’ At JH, Powell said: ‘we are attentive to signs that the economy may not be cooling as expected. Additional evidence of persistently above-trend growth could put further progress on inflation at risk’.
• The concerns over growth acceleration must partly reflect the Atlanta Fed GDP nowcast showing Q3 saar growth close to 6%, against the Fed estimate of 1.8% trend.
• Concerns that wage growth is accelerating again: Powell noted that the rebalancing of labour demand and supply had led to a wage growth slowdown. However, he warned that ‘Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.’
• Powell was likely reacting to recent wage data showing stabilization in the median wage YoY growth and faster MoM growth (Fed Monitor – Fast Growth Becomes a Fed Concern).

Powell’s JH speech makes NY Fed President Williams’ 7 August NY Times interview obsolete. Williams’ speech played a strong role in shaping dovish market expectations yet was out of sync with Powell’s JH speech:

• Williams had stronger conviction on his estimate of R* than Powell has. Williams said, ‘We definitely have a restrictive stance of monetary policy, real interest rates, such as one- to two-year yields, are well above what I think neutral is’.
• Williams had stronger conviction than Powell that disinflation will continue without additional policy tightening. Williams said, ‘It is an open question whether additional rate increases will be needed.’ Williams’ conviction is based on the NY Fed   multivariate core trend inflation model. Based on that model, Williams said, ‘you could easily imagine by the end of the year kind of an underlying inflation rate that’s more around 2.5, 2.75 percent.’
• Williams is more of an academic with faith in models than Powell is. Powell’s skepticism towards models has likely been strengthened by the Fed model’s 2021 prediction that high inflation would prove transitory.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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