The Fed’s annual Jackson Hole Symposium begins tomorrow. While some may be looking any hints on policy, we do not think any decisions will be made until the actual September 19-20 FOMC meeting given the Fed’s data-dependency mode. However, we expect Chair Powell and his colleagues to continue stressing their commitment to meeting the 2% inflation target. As such, a hawkish tone should emerge from the symposium.
All eyes are on the Kansas City Fed’s Jackson Hole Symposium. It begins tomorrow and ends Saturday. This year’s topic is ““Structural Shifts in the Global Economy” and a summary can be found here. The full agenda will be made available at www.kansascityfed.org at 6 PM MT/8 PM ET tomorrow evening. Last year’s symposium was " Reassessing Constraints on the Economy and Policy."
Of note, Jeffrey Schmid took over as President of the Kansas City Fed on August 21. He replaces Esther George, who retired on January 31 as required by the mandatory Fed rules. Kelly Dubbert served as interim President but Kansas City is a non-voter this year and so the staffing changes have had limited impact on Fed policy.
Fed Chair Powell gives his opening remarks Friday morning. It is scheduled to begin at 805 MT/1005 ET and will be streamed on the Kansas City Fed’s YouTube channel here. Anyone looking for short-term policy implications are likely to be disappointed. From the Symposium’s press release: “Papers will share how these developments are likely to affect the context for growth and monetary policy in the coming decade.” Thus, while we do not expect Powell to tip the Fed’s hand regarding Fed policy, he should make it clear that the Fed remains committed to meeting its inflation target over the medium and long term.
Looking beyond Jackson Hole, we do not think the Fed will make any pre-judgments on policy ahead of the September 21-22 FOMC meeting. It is truly data-dependent and we will get one each of the major data points (jobs, CPI, PPI, PCE, and retail sales) before the meeting. New macro forecasts will be released next month and should help guide market expectations. Given trends since the June meeting, growth and inflation forecasts should be raised and unemployment forecasts lowered. WIRP suggests only 10% odds of a hike next month and rising to 40% in November. Those odds should be much higher, in our view. The market is also pricing in solid odds of the first cut in March and is fully priced in for May. This seems unlikely given current trends in the U.S. economy but we’ll now more in a month.
Given this year’s symposium topic, many expect Powell to address r*, the neutral rate of interest. However, we expect any debate to be rendered moot by current circumstances. As we’ve note many times recently, financial conditions in the U.S. are as loose as they were right before the Fed started hiking in March 2022. How can anyone hope to estimate r* when 525 bp of tightening hasn’t gotten us to a restrictive rate that’s above r*?
Another factor to consider is that the U.S. economy’s sensitivity to interest rates appears to have ebbed during this tightening cycle. Is this a temporary or structural shift? That is to be determined but either way, it is a good reminder to policymakers everywhere that r* remains a moving target. Suffice to say that while r* is an important theoretical consideration for monetary policy, it is really not much help when it comes to actually running monetary policy.
The split between the Fed hawks and doves continues to grow. By our admittedly unofficial count as of this writing, the doves are comprised of Williams, Harker, Goolsbee, Barkin, and Bostic while the hawks are comprised of Bowman, Waller, Kashkari, Daly, and Mester. The centrists are led by Chair Powell and are comprised of Logan, Jefferson, Kugler, Barr, Cook, and Collins. Of note, Bullard stepped down as St. Louis Fed President and First Vice President Kathleen O’Neill Paese has assumed the duties of interim president as the search for a permanent successor has begun. Elsewhere, Schmid just became Kansas City Fed President August 21 and his views are at this point unknown. Neither St. Louis nor Kansas City are voting members of the FOMC this year.
The Dot Plots from the September meeting will be important. At the June meeting, 9 members saw a Fed Funds range of 5.5-5.75%, which implies one more hike from current levels. 2 saw a range of 5.75-6.0% and 1 saw 6.0-6.25%. In order to see the median Fed Funds for end-2023 rise from 5.625% to 5.875%, we would need 6 members to shift their terminal rate up in that manner. That may be a bridge too far for the centrists and so we expect the Dot Plots to remain largely unchanged for 2023 but with risks of a hawkish shift up for end-2024 from 4.625% currently. Fed Funds futures are pricing in an end-2024 rate of 4.5% and once again, we believe the market is getting the Fed totally wrong.
U.S. financial conditions remain too loose. The Chicago Fed’s measure of financial conditions is the loosest since early March 2022, before the Fed started hiking. Until financial conditions tighten, there’s unlikely to be any landing whatsoever as growth remains at or above trend.
Overall, the U.S. economy remains in good shape. The Atlanta Fed GDPNow model shows Q3 growth at 5.8% SAAR vs. 2.4% in Q2. While this is likely to be revised down significantly, momentum clearly persists we think it likely to mark the fifth straight quarter of at or above trend growth at a time when the Fed is trying to engineer below trend growth. Next model update comes tomorrow. Of note, Bloomberg consensus sees Q3 growth at 1.5% SAAR and Q4 at 0.3% SAAR.
Consumption remains strong. Retail sales for July were much firmer than expected as headline came in at 0.7% m/m vs. 0.4% expected and a revised 0.3% (was 0.2%) in June, while sales ex-auto came in at 1.0% m/m vs. 0.4% expected and 0.2% in June. The so-called control group used for GDP calculations came in at 1.0% m/m vs. 0.5% expected and a revised 0.5% (was 0.6%) in June. The y/y rate for the control group came in at 5.0% y/y vs. 3.8% in June and was the strongest since February. Personal spending (which covers services too) will be reported August 31 and is also likely to accelerate from June. Consumption remains relatively strong, boosted by the firm labor market and solid wage gains as well as relatively loose financial conditions.
Inflation readings have come down but have started to flatline at still-elevated levels. July headline CPI rose 3.2% y/y vs. 3.0% in June and was the first acceleration since June 2022. In H1, the y/y rates were flattered by high base effects but we will get the opposite in H2, when low base effects will tend to boost the y/y rates. Furthermore, gasoline and other energy prices have moved higher in H2, which will boost headline inflation. Elsewhere, core CPI rose 4.7% y/y in July vs. 4.8% in June and is the lowest since October 2021 and core PCE rose 4.1% y/y in June and is the lowest since September 2021. So yes, the Fed can cite progress in the inflation fight but cannot rest on their laurels when inflation remains well above the 2% target. As we’ve pointed out ad nauseum, getting inflation from 8% to 4% is the easy part; getting it from 4% to 2% will be much harder and will likely require some economic pain.
Indeed, the Cleveland Fed’s Nowcast model warns of persistent price pressures. Its estimates August headline and core CPI at 3.8% y/y and 4.5% y/y, respectively. It also estimates July headline and core PCE at 3.2% y/y and 4.2% y/y, respectively. For August, the Cleveland Fed estimates headline and core PCE at 3.6% y/y and 4.0% y/y, respectively. In other words, not much progress in meeting the 2% target. Until the economy slows to sub-trend growth and the labor market loosens, it’s hard to see how we can get significant disinflation and so we believe the Fed will have to go higher for longer, as it has promised. Perhaps the markets will finally start believing them. Again.
For now, we are sticking with our broad macro calls. These include U.S. economic outperformance, a stronger dollar, U.S. equity outperformance, and the further bear steepening of the U.S. yield curve. Yet our calls hinge critically on our view that the U.S. economy remains robust for the rest of this year. This will be tested time and again and we expect heightened volatility across all markets in the coming months.
We remain dollar bulls. As bad as things may get in the U.S., the rest of the world looks even worse. Dollar bears should be asking whether the euro or sterling look that much better than the dollar. China too is looking quite weak and in that regard, EM will likely remain under pressure. Not only is China struggling to grow but because of the knock-on effects to EM growth, policymakers there are likely to cut rates sooner rather than later. Hungary, Chile, and Brazil have already cut rates and Poland is up next. Lower EM rates combined with a hawkish Fed, higher U.S. rates, and a stronger dollar should continue to put downward pressure on EM FX .
The data remain key. If the outlook changes and the U.S. economy slows significantly, then it would be a likely game-changer for the dollar. The Fed would likely stop tightening. Yet even then, the dollar may hold up better than expected since the Fed is unlikely to cut rates quickly. Also, a U.S. recession would likely be part of a broader global downturn where Europe fares even worse. As always, it all goes back to relative performances in FX. Indeed, PMI readings for August offer a stark contrast. Australia came in very weak, obviously due to weakness in China, while the U.K. and eurozone came in much weaker than expected as aggressive tightening cycles start to bite. In addition, Europe is much more impacted by a weak China than the U.S. is and so the eurozone is likely to continue underperforming economically.
A BRIEF HISTORY LESSON
Roger Guffey became Kansas City Fed President in 1976. In 1977, Guffey was invited to attend the Boston Fed’s conference that focused on “Key Issues in International Banking.” The Boston Fed’s event was part of a series that started back in 1969 by then-Boston Fed President Frank E. Morris. Due to its location on the East Coast, the Boston Fed was able to attract top academics from the Ivy League schools as well as senior policymakers.
Inspired by the Boston Fed’s event, Guffey and his research director Tom Davis helped launch the Kansas City Fed’s version a year later. They chose agriculture as the topic for their first symposium. There were more than 200 attendees that focused on “World Agricultural Trade: The Potential for Growth.” It was held in Kansas City, but moved permanently to Jackson Hole in 1982. Along with western Missouri, Wyoming is in the Tenth Federal Reserve District.
Here are Guffey’s opening remarks from 1978: “(This) symposium on agricultural trade represents the first of what we hope will become an ongoing series of conferences on important economic issues. As we developed this program, our major objective was to consider an economic topic about which important public and private decisions will be made during the coming years. We also wanted the topic to be of significant concern not only to the Tenth Federal Reserve District served by this Bank, but also by the nation as a whole. A related objective was to bring together, in a suitable setting, a group of top-level decision makers from business, government and academia who have considerable expertise in the selected topic. In doing so, the symposium would serve as a vehicle for promoting public discussion and for exchanging ideas on the issue in question.”
The Fed has used the Jackson Hole Symposium in the past to unveil significant policy shifts. Then-Chair Bernanke made the case for QE3 at the 2012 symposium and it was announced at the very next meeting in September. While no official announcement of tapering was made at the 2013 symposium, the discussion was already under way and was furthered by several presentations. Tapering was then announced at the very next meeting in September. Powell announced the Fed’s new policy framework at the 2020 symposium.