Powell's Jackson Hole speech comes with Fed and the market on different pages

Published Sun, Aug 21 20228:21 AM EDT

The Federal Reserve keeps telling the market it's serious about conquering inflation even if that means damage elsewhere. But the market is still having a hard time taking it seriously. So it will be up to Fed Chairman Jerome Powell next week to press the case further. The central bank leader will address his colleagues Friday at 10 a.m. ET at the Fed's annual symposium in Jackson Hole, Wyoming. This year's focus at the Kansas City Fed-sponsored event will be "Reassessing Constraints on the Economy and Policy." Market participants will be looking for clear guidance about how far policymakers are looking to push the inflation fight, what the criteria will be and what might be the consequences from the fight. "The market is as data dependent as the Fed is, if not more. [The market wants] just some clarity on how he sees getting to price stability," said Quincy Krosby, chief equity strategist at LPL Financial. During a summer that has seen the most aggressive pace of Fed policy tightening since the early 1980s days of then-Chairman Paul Volcker, the market nevertheless maintained a sunny disposition. The S & P 500 has rallied about 17% on the backs of both better-than-expected corporate earnings — and a belief that the Fed will take as delicate an approach as feasible in its inflation battle. That reaction has seemed to contradict the statements of multiple Fed officials who have said inflation is the primary challenge right now and demands an anything-it-takes approach. Determined to be dovish Earlier this week, St. Louis Fed President James Bullard told The Wall Street Journal he would like to see a third consecutive 0.75 percentage point interest rate increase at the September meeting. Minneapolis Fed President Neel Kashkari said Thursday that he's committed to fighting inflation and isn't sure whether it won't come at the cost of a recession. And San Francisco Fed President Mary Daly said she expects the Fed to hold rates steady once it hits a restrictive level — contrary to market expectations for a rate cut in 2023. Markets, though, have continued to rally even when Fed officials warn of more rate hikes, as was the case with Governor Michelle Bowman , who said earlier this month that "similarly sized" rate increases as the three-quarter point ones are likely needed ahead. "Risk markets seem determined to read a dovish message into Fed communications that we think simply is not there." Citigroup economist Andrew Hollenhorst said in a note this week. "A committee that values its 'resolve' in fighting inflation is unlikely to turn substantially more dovish so long as underlying inflation remains well above target and is not convincingly slowing." But the week ended on a sour note , and it could be because comments from Bullard and others started to resonate with investors. "This year's Jackson Hole Symposium comes at a critical juncture for monetary policy," Matthew Luzzetti, chief economist at Deutsche Bank, told clients in a note. "Officials are plotting how to downshift from this 'unusual' pace of tightening in a way that retains inflation fighting credibility while maintaining prospects for a soft landing." The warnings are echoing around Wall Street. Bank of America chief equity strategist Michael Hartnett warned that the current market surge is likely just a bear rally that could come undone as investors realize the Fed still has a lot of work to do on inflation. The bank's economists said even the recent spate of better-than-expected news on jobs and retail spending should be viewed with caution, as "stronger incoming data reduces the probability that the economy will slip into recession in the near future, but, it likely increases risks of a hard landing over time since it could mean more tightening from the Fed." Market pricing has tilted towards a half-point rate hike next month, and the Street does not expect Powell to provide any clear signals about which way he's leaning. "How far are you prepared to go until you reach price stability?" LPL's Krosby said. "That's ultimately what the market wants to know, and I'm not sure he's prepared to tell us."