There is a high risk that markets might be disappointed in the interest-rate policy signals that emanate from the Federal Reserve’s summer retreat in Jackson Hole late next week, economists say.
Fed officials will gather with academics and foreign central bankers next Thursday in the Grand Tetons in Wyoming to discuss the economic outlook. Fed Chairman Jerome Powell will deliver a closely-watched speech on the challenges facing monetary policy at 10 a.m. Eastern on Friday.
Markets want to know what Fed officials think after the U.S. bond market sent a signal of a possible recession this week. The Dow Jones Industrial Average
saw the biggest one day fall this year on Wednesday, as longer dated U.S. Treasury yields
fell briefly below short term yields, suggesting investors believe the first recession in a decade lies ahead.
Many economists think the market most wants to hear a willingness from the Fed to do “whatever it takes” to combat any downturn.
But the Fed isn’t likely to shed any light on where policy will go after a likely quarter-point cut in interest rates in September, said Avery Shenfeld, economist at CIBC.
The Fed won’t want to make any statement that could create problems for it later, agreed Ian Shepherdson, chief economist at Pantheon Macroeconomics.
In that way, market hopes for Powell to signal a half percentage point interest rate cut in September are likely to be dashed.
“Given the July decision, when the cut was only 25 basis points and Powell seemed unable to lead the FOMC to a bigger cut, the risk of any speech disappointing market expectations for dovishness is high,” agreed Seth Carpenter, economist at UBS, in a note to clients.
The Fed cut its federal funds policy interest rate in July for the first time since the financial crisis of 2008.
Former Fed governor Larry Meyer said he thought Powell would stick to his guns that the July Fed rate cut was a “mid-course correction” and not the start of a race to slash interest rates back to zero.
Powell and other Fed officials will want to “avoid stirring the pot, Meyer said.
“They don’t want to give a sense the economy is weaker than it is,” Meyer said. “They don’t want to come in and reinforce expectations of a 50 basis point cut,” he added.
Officials want to keep a half-point cut in their back pocket in case market conditions and the economy deteriorate further. Currently unemployment is at a 50 year low and inflation is below the Fed’s 2% target, but there are signs that manufacturing activity is slowing and the farm sector is suffering due to the tariffs on imports from China that President Trump has imposed in the past year.
Investors see a 100% chance of the Fed cutting interest rates by a quarter percentage point at its next meeting on Sept. 17-18, according to the CME Group’s FedWatch tool. Chances of a half-point move have hovered closer to 30%.
In addition to Jackson Hole, the Fed will publish the minutes of its July policy meeting at 2 p.m. Eastern on Wednesday.
Meyer said the Fed officials in July “were more split than we’ve seen in a very long time,” with two policy makers formally dissenting and a handful of other non-voting officials opposed to the Fed’s decision to lower its benchmark fed funds rate to a range of 2 to 2.25%.
While the minutes should technically be old news, before the inversion of the yield curve this week, “the Fed has shown a willingness to use the FOMC minutes as a communication tool” and signal their updated thinking, said Kevin Cummins, economist at NatWest Markets
In addition, the economic calendar this week will feature two reports on the housing market, existing homes sales for July on Wednesday and July new home sales on Friday.
Stocks were on pace for their third straight weekly loss on Friday even though the Dow Jones Industrial Average
was up by 280 points late in the session.