[REPOST] PRIMER: Fed chair Powell at Jackson Hole (09:10 EDT/14:10 BST); what to watch

Analysis details (10:45)

SUMMARY: The immediate focus will be on whether the Fed has concluded its framework review fully, or if it is near completion. The Fed is expected to announce Average Inflation Targeting (AIT), but will this come with specific figures and commitments, or will it be of a fuzzier variety, allowing the Fed more flexibility? What are the implications for yield curve targeting, which the Fed appears to have cooled on? Does the Fed choose to retain that tool within its toolkit, or will it be dismissed more aggressively? How will the framework review evolve the Fed’s forward guidance? Will Powell provide any steer as to whether a consensus is developing around a certain type of forward guidance? On the outlook, Powell will likely highlight the uncertainty facing the US economy, and urge fiscal authorities to lend further support to the recovery.

NOTE: this primer is intended to compliment our full preview, which can be accessed here. The full schedule can be accessed here.

FRAMEWORK REVIEW: Has the Fed fully concluded its framework review? If the framework review is only near completion, it might imply that Powell is still struggling to engineer a consensus on some of the key issues. An updated ‘Statement on Longer-Run Goals and Monetary Policy Strategy’ is expected at the September 16th FOMC. Either way, Powell is expected to reveal excerpts, and will likely announce that the FOMC is to adopt a regime of Average Inflation Targeting. 

AVERAGE INFLATION TARGETING (AIT): The theory is that such a target would aim to overshoot the inflation goal while the economy is at full employment, to make up for shortfalls during downturns. The question is whether the Fed explicitly commits to make up the inflation ‘shortfall’, or will there be a willingness to let inflation ‘run hot’ for a period? Additionally, will the Fed state a numerical value for its AIT regime, say 2.00-2.25%, or 2.00-2.50%? Specifying the target comes with its own problems, such as having to define exact points of a business cycle.

YIELD CURVE TARGETING (YCT): Applying ‘caps’ to the short-end of the yield curve would effectively be a ‘stick’ to force the market to trade within defined levels, in line with the Fed’s guidance, and preventing any market tantrum that leads to an unwarranted tightening of financial conditions (in the Fed’s opinion, of course). But the July meeting minutes made clear that the Fed is not warm to outright yield curve targeting just yet. Nevertheless, the central bank will likely want to retain it as an option in case it is needed in the future. Accordingly, the review may discuss how the tool might be useful in certain conditions, though reiterate that the Fed was not intending to use these in the near-term. 

FORWARD GUIDANCE: The immediate consideration is what the new policy framework will mean for forward guidance. Explicit changes to forward guidance – via either outcome-based or calendar-based – are likely to come after the September FOMC. The July minutes did not commit to a specific type of forward guidance, and even discussed a hybrid of the calendar/outcome options. We therefore look for a steer from Powell. Another area to keep an eye on is what the framework review and new forward guidance means for the infamous dot plot. Finally, what are the implications for the Fed’s asset purchases? The Fed has yet to formalise the pace of its bond buying within its statement ­– which some analysts had expected to be announced in July.

CURRENT OUTLOOK: If Powell comments on the current outlook, he is likely to reiterate his views from the July FOMC, where he generally leaned dovish, noting that the momentum of high-frequency data had slowed since June. Powell also suggested that household spending had recovered, around half of its pandemic decline, partly due to fiscal stimulus, though business investment was yet to recover. In July, the Fed chair reiterated that the labour market has a long way to go to recovery, though on inflation, price pressures were running significantly below the Fed’s target due to weaker demand. Powell will mostly likely again call on fiscal authorities to lend support amid the extraordinary uncertainty facing the economy.

POTENTIAL MARKET REACTION: JPMorgan notes that stocks have continued to do well, but there is scope for disappointment if Powell is ambiguous around AIT. But if the Fed chair sets the stage for a roll-out of the framework at the September meeting, the USD may have scope to sell-off, the bank thinks, and it could be by a decent degree if Powell reveals specifics and assurances that the Fed is moving forward.

27 Aug 2020 - 12:15- Research Sheet- Source: Newsquawk