INTRODUCTION

The Fed’s annual Jackson Hole Symposium will be held August 22-24. While some may be looking for any hints on policy, we do not think any decisions will be made until the actual September 17/18 FOMC meeting given the Fed’s data-dependency mode. However, we expect Chair Powell and his colleagues to set the table for a September cut while stressing that the rate path remains data-dependent, and that the U.S. economy remains relatively robust.

JACKSON HOLE OUTLOOK

All eyes are on the Kansas City Fed’s Jackson Hole Symposium. This year’s topic is "Reassessing the Effectiveness and Transmission of Monetary Policy," and the full agenda will be made available Thursday evening at www.kansascityfed.org at 6 PM MT/8 PM ET. Last year’s symposium topic was “Structural Shifts in the Global Economy.” Recall that Powell delivered a very hawkish message in 2023 when he said the Fed is prepared to raise rates further if appropriate and that persistent above-trend growth could warrant this. Powell stressed that the economy needs to grow below trend in order to get inflation back to the 2% target, and that if labor market does not ease, the Fed will respond. The Fed did not hike again but we note this to show that Powell can be hawkish when needed.

Fed Chair Powell speaks on the economic outlook Friday morning. It is scheduled to begin at 8 AM MT/10 AM ET and will be streamed on the Kansas City Fed’s YouTube channel here. Judging by recent Fed official comments, the Fed is setting the table for the start of an easing cycle. However, most officials continue to see a relatively strong labor market and so there may be some pushback to aggressive Fed easing expectations. We expect Powell to set the table for a cut next month whilst stressing the data-dependent nature of the Fed’s monetary policy decisions and pushing back against any sort of pre-commitment to an aggressive easing path. Powell has already successfully pulled off a mid-cycle adjustment back in 2019 and so he can draw on that experience.

Part of the Fed’s job is to maintain confidence. Not only maintaining market confidence that the Fed is doing its job fighting inflation, but also maintaining the confidence of consumers and firms that the economy will continue growing. That is why we believe the Fed will stress that this is not the start of an aggressive easing cycle. If the Fed were to cut intra-meeting or cut by 50 bp, that would undermine the Fed’s efforts to maintain confidence, and we could see a self-fulfilling prophecy in terms of recession.

Fed comments from the past week do not convey any sense of urgency or panic. Daly* pushed back against the need for rapid cuts and stressed that “Gradualism is not weak, it's not slow, it's not behind, it's just prudent.” Musalem said that he views the labor market as having “normalized” in recent weeks but is still showing signs of being “rather strong.” Kashkari said, "The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have." He added that "If we were not seeing evidence that the labor market was weakening, if the unemployment rate was still in the 3.7% to 3.8% range, I don't think I would be even debating, 'Hey, is now the time to cut rates?’” Bostic* said that while a rate cut is coming, he wants to see a little more data. Bowman* noted that the recent jump in unemployment to 4.3% in July may be exaggerating the degree of labor-market cooling.
*Voter in 2024

September 17-18 FOMC Meeting Outlook

We do not think the Fed will make any pre-judgments on policy ahead of the next meeting. Yes, a rate cut is fully priced in. However, there is an ongoing debate over whether it will be 25 or 50 bp. We believe it is truly data-dependent and we will get one of each major data report (jobs, CPI, PPI, PCE, and retail sales) before that meeting. After being fully priced in during the market turmoil, the odds of a 50 bp cut next month are now quite low. Fed Funds futures imply 30% odds, while OIS imply 15%. To us, 50 bp seems unlikely given current trends in the U.S. economy but we’ll know more over the next several weeks.

The updated Dot Plots will be important. At the June meeting, 8 members saw a year-end Fed Funds rate of 4.875% (two cuts), 7 saw a rate of 5.125% (one cut), and 4 saw a rate of 5.375% (no cuts). As a result, the 2024 median moved up to 5.125% from 4.625% in March, while the 2025 median moved from 3.875% to 4.125% and the 2026 median was unchanged at 3.125%. By our calculations, it would only take three policymakers switching their 2024 Dot from 5.125% (one cut) to 4.875% (two cuts) to get a similar drop in the 2024 median to 4.875%. This seems the most likely outcome, as we do not think any members will switch their 2024 Dot to 4.625% (three cuts). By the same token, it would take only four policymakers switching their 2025 Dot to 3.875% from 4.125% to get a similar drop in the 2025 median to 3.875%. This is also very possible. Lastly, it would take seven policymakers switching their 2026 Dots to 2.875% from 3.125% to get a similar drop in the 2026 median to 2.875%. This seems unlikely.

New macro forecasts will also be released and should help guide market expectations. Given the economic data seen since the June meeting, growth and inflation forecasts should be lowered modestly and unemployment forecasts raised modestly.

ECONOMIC OUTLOOK

U.S. financial conditions tightened modestly during the recent market turmoil but are likely to loosen in the runup to the September 17/18 FOMC meeting. The Chicago Fed’s measure of financial conditions have tightened four straight weeks through August 9 but remain relatively loose given the 525 bp of tightening by the Fed. Elsewhere, the New York Fed’s FCI-G measure shows that financial conditions in July continued to stimulate the economy.

Indeed, the U.S. economy remains in solid shape. The Atlanta Fed GDPNow model is tracking Q3 growth at 2.0% SAAR vs. 2.8% actual in Q2, while the New York Fed’s Nowcast model is tracking Q3 at 1.8% SAAR. Both estimates are down from their highs, but 2% growth is still quite respectable. The New York Fed will provide its first estimate of Q4 growth at the end of August.

Consumption remains strong. Personal consumption grew 2.3% SAAR in Q2 vs. 1.5% in Q2. That strength seems to be carrying over into Q3, as retail sales for July were much firmer than expected. Headline came in at 1.0% m/m vs. 0.4% expected and a revised -0.2% (was flat) in June, while sales ex-auto came in at 0.4% m/m vs. 0.1% expected and a revised 0.5% (was 0.4%) in June. The so-called control group used for GDP calculations came in at 0.3% m/m vs. 0.1% expected and 0.9% in June. Personal spending (which covers services too) will be reported August 30 and is expected to accelerate to 0.5% m/m vs. 0.3% in June.

The labor market remains relatively healthy. While the unemployment rate has been edging higher, noted economist Claudia Sahm (of Sahm Rule fame) chalks up much of that rise to a growing labor force rather than job destruction. Indeed, NFP has averaged 209k per month through July even as layoffs (as reported in JOLTS data) have remained fairly steady. Sticking with the JOLTS data, job openings are stuck above 8.0 mln and remain well above pre-pandemic levels, while the openings rate of 4.9% remains well above the 4.5% threshold that typically signals a significant rise in the unemployment rate. Bottom line: As long as jobs are being created, consumption will remain robust.

BLS releases its preliminary annual payrolls benchmark revisions. This is typically not a market-mover. However, given the current intense focus on the labor market, this year’s revisions could have a greater than usual impact. Estimates are all over the place, ranging from -360k to -600k, with one institution warning of a potential -1 mln. Recall that last year’s -306k revision was largely ignored by the markets, which followed the +462k revision in 2022, -166k in 2021, -173k in 2020, and -501k in 2019. Note that the revisions will only impact NFP and not the unemployment rate, which is derived from the household survey.

Inflation readings have come down, but progress has been slow. July headline CPI rose 2.9% y/y vs. 3.0% in June, while core CPI rose 3.2% y/y in July vs. 3.3% in June. Both were the lowest since early 2021 but after rapid progress from mid-2022 to mid-2033, the disinflation process has slowed. Super core CPI (services ex-shelter) remains elevated at 4.5% y/y. So yes, the Fed can cite progress in the inflation fight but cannot yet proclaim “Mission Accomplished.” As we’ve pointed out ad nauseum, getting inflation from 8% to 4% is the easy part; getting it from 4% to 2% has proven to be much harder and has kept rates higher for longer. Now, the Fed Funds rate will finally come down, but the pace will be measured and cautious.

Indeed, the Cleveland Fed’s Nowcast model warns of persistent price pressures. It estimates August headline and core CPI at 2.6% y/y and 3.2% y/y, respectively. It also estimates July headline and core PCE both at 2.6% y/y. For August, the Cleveland Fed estimates headline and core PCE at 2.4% y/y and 2.8% y/y, respectively. In other words, there is progress in meeting the 2% target, but it remains slow.

INVESTMENT OUTLOOK

For now, we are sticking with our broad macro calls. These include U.S. economic outperformance, a stronger dollar, and U.S. equity outperformance. U.S. yields are a bit harder to predict, as we cannot say when the current Fed mispricing will correct. 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. But until the dovish Fed pricing corrects, the greenback will remain under pressure. That said, 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, EM policymakers are likely to continue cutting rates whenever possible. Lower EM rates combined with a cautious Fed, sticky U.S. rates, and a stronger dollar should put renewed downward pressure on EM FX.

The U.S. 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 ease much more aggressively than we currently foresee, something that Powell is capable of doing when the need arises. That said, a U.S. slowdown or recession would likely be part of a broader global downturn where Europe fares even worse. Indeed, Germany is already contracting in Q2. As always, it all goes back to relative performances in FX. Indeed, PMI readings for July offered 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. It remains to be seen whether this is sustained in August, when PMIs are reported Thursday.

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.

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 inflation overshooting policy framework at the 2020 symposium.