The Hawkish Dropdown

It is finally Jackson Hole and all market eyes will be on Powell’s speech at the end of this week. The tricky duality that Powell will likely communicate over the coming weeks is that the rate hiking cycle is now changing as policy breaches restrictive levels and headline inflation pressures peak. However, inflation will likely continue to be a problem for an economy with a lot of private sector liquidity and not a lot of productivity, wage growth that is +5% and rent growth that is +5-10%. As I wrote a few weeks ago, inflation is cyclically falling but is structurally high and Jackson Hole is a good place for the Fed chair to map out the plan for dealing with that duality.

The most important theme for this week and really going into the September FOMC is how does the Fed dropdown from 75 to 50bps without it being perceived as an ease on financial conditions (FCIs)? Jackson Hole is the start of this journey, the beginning of, “we want to go to 50bps, but we are not done in this fight.”