Here’s What Jerome Powell Will Say At Jackson Hole, According To Goldman

What was already a difficult task for J-Powell who leads off Friday’s J-Hole symposium with a closely watched speech at 10am (webcast here), became even more complex when in addition to red hot inflation, today’s data confirmed that the housing market is crashing faster than expected, while the US service economy remains mired in deep recession, leaving the Fed chairman trapped: does he come out as hawkish and warn of a 75bps hike, making the recession even worse, or does he stay the somewhat dovish FOMC course, which however would send stocks shooting higher and undo all the financial condition tightening observed in recent months, while boosting inflation further.

Really sucks to be ole Jerome right now

— zerohedge (@zerohedge) August 23, 2022

While nobody knows what the Fed chair will say, the one bank that probably has some clue is the one that has spawned more central bankers than any other place on earth: Goldman Sachs.

In a note published this afternoon (and available to pro subs) Goldman economists Jan Hatzus and David Mericle lay out not only what Powell’s Challenge is (slowing the pace without easing financial conditions), but also what the former lawyer could say. We excerpt from the full note (as usual, the entire report is available to professional subscribers):

Cutting to the chase, Goldman expects Powell to reiterate the case for slowing the pace of tightening laid out in his July press conference and the July minutes released last week, while also stressing that the FOMC remains committed to bringing inflation down and that policy decisions at upcoming meetings—including in September—will depend on incoming data. “This will require striking a delicate balance.”

Some more takes from the Goldman economists: :

Powell offered several reasons for slowing down in his press conference at the July FOMC meeting. He noted that 75bp hikes are unusually large, that the full effect of rate hikes has not yet been felt, and that the FOMC is aiming to rebalance supply and demand through below-potential growth, not a recession. The minutes to the July meeting that were released last week noted that many participants saw a risk of overtightening in a quickly changing economic environment. Our sense is that the Fed leadership feels strongly that it is appropriate to move at a slower pace going forward to reduce the risk of unintentionally causing a recession, and that Powell will want to repeat this message at Jackson Hole.

Powell will likely balance that message with more hawkish language that emphasizes the FOMC’s firm commitment to bring inflation down. He is also likely to provide a balanced assessment of progress to date on the FOMC’s efforts to lower inflation without a recession. This might include noting that job openings have fallen sharply but monthly hiring remains very strong, or that commodity prices have fallen and supply chain disruptions are diminishing, but underlying wage growth and inflation trends remain much too high. In short, that there are early signs of progress, but there is still a long way to go.

What about risks of a dovish flip? 

As the Goldman economists ask rhetorically, “would Powell really risk sending a dovish message that could reinforce the easing in financial conditions that followed the July FOMC meeting shown?” In keeping with what it said previously, Goldman suspects that the Fed leadership saw the recent easing as unhelpful to its task of keeping the economy on a below-potential growth trajectory, but not problematic enough to scrap its plan to slow the pace of tightening or even to refrain from discussing that plan at Jackson Hole. Much of the easing in financial conditions has reversed and its impact is now quite modest. Moreover, the easing has been driven entirely by a rally in the equity market that has occurred alongside a modest rise in interest rates, suggesting it is less a result of dovish Fed guidance than of premature reassurance about the inflation outlook in the equity market that Fed officials did nothing to encourage.

The economic data since the July meeting have also probably been good enough on balance to keep the original plan on track. While the July employment report was very strong, the softer-than-expected CPI and PPI reports have likely kept the leadership comfortable proceeding with the plan to slow down.

In conclusion, Goldman continues to expect the FOMC to slow the pace of rate hikes to 50bp in September and 25bp in November and December, consistent with Powell’s endorsement of the June dots in his July press conference. That said, there is upside risk to both the near-term pace and the bank’s terminal rate forecast of 3.25-3.5% from the recent easing in financial conditions, the robust pace of hiring, and signs of stickiness in wage growth and inflation. There is clearly a range of views on the FOMC, including support for a faster pace. If the FOMC decides to tighten more aggressively, the Fed leadership would prefer to deliver multiple 50bp rate hikes rather than another 75bp rate hike in September.

More in the full note available to pro subs.