Markets priced for ‘higher for longer’ rate policy but all eyes will be on the next CPI print
At his Jackson Hole address, Federal Reserve (Fed) Chair Jerome Powell gave his starkest commitment yet, indicating he is willing to fight inflation and markets have had to price in quite quickly a ‘higher for longer’ rate policy. Markets had until now assumed that the policy response was ripe for admittedly not quite a pivot but certainly a softening in tone. However, Powell’s remarks were more than unsettling against this view. Compared to his dovish July press conference, this seems like almost an about-turn – channelling the late great Fed inflation buster of years gone by, Paul Volcker, Powell’s apparent commitment to plunging the economy into perhaps a deeper recession now seems more likely given this aggressively hawkish tilt. Or could it just be the need to appear tough having been so far behind the curve and so blatantly wrong on the transient inflation narrative of last year? Whichever it is, markets will attempt to price in the more aggressive tone and no doubt further upside and downside surprises will come down the line. Trading around these events is impossible at inflection points and we believe we are near, if not at, them right now – the next obvious signpost being the all-important CPI print coming on 13 September.
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