Could FOMC minutes be hinting at a hawkish Jackson Hole speech?

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As we reach the end of August, all eyes are once again on the Grand Tetons. 

Not because of its striking views, but because the annual Woodstock of central banking is about to go down. 

Tomorrow morning, Fed Chair Jerome Powell will deliver his keynote speech. Historically, these speeches have served as key inflection points for the Federal Reserve’s thinking on monetary policy from a high level. More importantly, it’s an opportunity for Powell to speak for himself and not on behalf of the whole FOMC committee.

There are two key catalysts to consider as we await tomorrow’s speech. 

The first: any indication about whether a rate cut will come in September. 

Right now, CME futures project a 71% odds of a cut, down from 92% odds last week:

The crux of this consideration is a very weak jobs report last month, combined with inflation that seems to keep surprising to the upside and shows no signs of returning to the Fed’s 2% target. 

Andy Constan tweeted out a helpful framework of how to think about the probabilities of what could happen here:

The second potential catalyst: The Fed will publish the results of its five-year monetary policy framework review. 

In its last review in 2019, the FOMC introduced its flexible average interest targeting (FAIT), which targeted an average of 2% of inflation over the long term. With inflation running above its 2% target for nearly five years now, this framework is expected to be retired and a return toward a hardline target of 2% is anticipated. 

Underlying this shift are implications around what the Fed perceives to be the neutral rate. 

Right now, the Fed sees the current federal funds rate as slightly above neutral. This opens the possibility of Fed cuts without an easing stance. If the Fed were to move its neutral rate higher, such a move could indirectly imply that it no longer thinks the cuts are restrictive and thus dampen expectations of imminent reductions.

Personally, I believe the FOMC meeting minutes from July lay the groundwork for a hawkish surprise tomorrow. 

The minutes were outright hawkish and hinted at a committee that is not inclined to cut at all:

That said, these minutes were written before the weak jobs report that sparked expectations of rate cuts in September, so they could be seen as stale. I disagree with that notion. 

These minutes can be tweaked up until right before they are released and every FOMC member needs to sign off and approve them — including non-voting presidents and the dissenters from the last meeting. 

I believe that despite the weak jobs report from last month, the inflation story is still so volatile that Fed officials were keen to still showcase these hawkish minutes. Knowing that these were going to be the last breadcrumbs of monetary policy stance before Powell’s Jackson Hole speech, I believe they hint at a committee that is much less committed to a September rate cut compared to what markets currently believe.

Let’s see how much of that ends up being correct tomorrow or whether I’ll be eating crow.

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