What Jay Powell Probably Will and Won't Say at Jackson Hole

The theme of this week so far in the stock market has been "Waiting for Jay." There was once again a feeling of expectation, but with a distinct lack of excitement, during this morning's pre-market trading. Weekly jobless claims and even the GDP, things that should have moved the needle a bit, came and went. Evidently data weren’t what traders were waiting for. No, they are holding off on any big decisions until Fed Chair Jay Powell gives his planned speech at the Jackson Hole, Wyoming economic symposium.

So, what can we expect when Powell gives his address tomorrow?

There was a time when forecasting what a Fed Chair, or any central banker for that matter, might say was a dangerous game. Throughout the 1970s and 80s they seemed to think of themselves as mysterious and intriguing and loved nothing more than to shock markets when they spoke. I well remember from when I worked in forex trading rooms the chaos that would occasionally break out when a central bank surprised us with a statement or a move in the markets. That, however, has changed. Now, Fed Chairs are all about transparency, and spend months talking about any move before they actually do anything.

I suppose that is a better way of handling things, but it creates its own problems. It means that every word of every speech and announcement is parsed for possible shifts in policy, or even just in mood. That may seem harmless, but it can lead to a lot of misunderstandings and misinterpretation. If you look hard enough for hints at just about anything in a long speech you will find some, even if none were intended. That overinterpretation is the biggest danger when Powell speaks tomorrow and it may be just that, not any policy shift or change in expectations, that causes any reaction we might see in the stock market.

Let’s face it, we know what he and other FOMC members are thinking right now, and nothing has really changed since the last committee meeting a month ago. We still have inflation, and the Fed is still determined to combat it with rate hikes and balance sheet reduction. More controversially, they also believe that they can do that without tipping over a full-blown, job-destroying recession. Of course, we shouldn’t expect them to say anything else, but a lot of time and energy has been wasted looking for hints that they may not truly believe it. So far though, the jobs market has shown them to be right, so I don’t see why they would lose any confidence now in their ability to pull off a miracle.

What we are most likely to hear tomorrow, then, is best described as "more of the same." Powell will presumably say that inflation is the number one enemy and that the Fed is acting to counter it. He will tell us that they intend to continue doing so, while keeping a watchful eye on the data to look for signs over time that their actions might be creating a recessionary environment, and they will act accordingly should that happen.

What he won’t tell us is that after more than a decade of distortion of the bond market, he and his colleagues have no idea what a “neutral” rate would be in the 10-Year, or at any point on the curve for that matter. Nor will he say that the approach he will outline, relying on multi-month averages of backward-looking data, is what led them to be slow enough in the first place when it came to reacting to inflation, making their task a lot harder than it maybe needed to be.

Those two things are related, by the way. If you have no idea what a neutral rate is, you don’t know when to stop cutting or raising them and, if you are changing rates every month while looking at data averages that are by nature several months out of date, you will almost inevitably go too far in both directions.

It is those things that Jay Powell will not say tomorrow that are more important than what he will say. When you start to hear earnest breakdowns of every word uttered at Jackson Hole, be careful. Those looking for some subtle changes to the language or nuanced hints will probably find them but, in the grand scheme of things, they won’t matter. The Fed is aware of the corner they have painted themselves into and know the dangers of what they are now doing, but, just as data dependency led to them keeping rates too low for too long, it will almost inevitably lead to them raising them too high.

They might, at some point, find the happy medium without destroying too many jobs, but we will be no closer to that, or to knowing if that is possible or when it might happen, after Jackson Hole than we are before.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Economy Markets Stocks