Fed Jackson Hole: What to expect from Chair Powell’s speech

Yahoo Finance Live’s Brian Cheung discusses the expectations for the Federal Reserve’s Jackson Hole Symposium.

Video Transcript

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- Sometimes you got bears, sometimes you got bulls. That said, here are a few things you need to know right now. The summer stock rally looks to be fizzling as investor attention turns once again to the Federal Reserve. We will hear more from Fed Chair, Jerome Powell, this week at the Central bank's Annual Jackson Hole Economic Symposium for a look ahead at what this week in Wyoming holds. Let's bring in Yahoo Finance's, Brian Cheung. Brian, busy week for you on tap, busy week for the markets on tap. What do you think we'll hear from the Fed?

- Yeah. Look, I got to get my hiking boots ready for the trip out to Jackson Hole. That event starting on Thursday. The big speech from Jay Powell expected on Friday. And now, all we know is that his speech is going to be on the economic outlook, which leads us all to kind of speculate on what he's going to talk about.

Now, the likes of Fed watchers from Deutsche Bank, for example, are expecting him to want to make a little bit of a hawkish tone in his speech and that's because of the fact that markets likely didn't get the message from their July meeting. You'll recall that after the Fed raised by an unusually large 75 basis points in that last meeting, the Fed said more interest rate hikes were going to be happening.

But what happened? The stock market rallied, bond yields went down. So the Federal Reserve likely expected to reiterate that they're going to continue to hike interest rates, despite that more optimistic read on the July CPI. Deutsche Bank saying, quote, "Likely to skew his comments in a hawkish direction in an effort to ensure the Fed's inflation fighting credentials are not questioned again."

But that doesn't mean get more forward guidance on the September meeting, that's the next policy-setting meeting, which is going to come in about three or four weeks. Because, right now, markets a little bit teetered in terms of where they expect to see the Fed move in that meeting.

If you a look at markets pricing, for example, about 50/50 odds essentially, a toss up between whether or not it's going to be 50 basis points or 75 basis points. And we've seen the swing in the few weeks after the July meeting, but the problem is we're going to get another job support and another read on CPI after Jackson Hole. So the Fed likely won't want to pin itself into a corner by saying one way or another, but maybe just more clues in terms of how the Fed is going to be data dependent in the weeks to come.

- Yeah. A couple of interesting things stood out to me this morning. The team over at JP Morgan, the strategists there, they are saying they think that the Fed hike in September is going to be the last of the big ones in terms of the 50 basis points or higher it seems like. That stood out to me as interesting.

On the other hand, "Bloomberg" did a survey of 900 professional investors, what they call their "M-Live Pulse Survey," and most of them, the vast majority of them think it's going to take a really long time for the Fed to get inflation down to 2%. 39% of them said it's going to take longer than two years to get to that point. So the Fed, I mean, the job is far from done I guess is what I'm trying to say.

- Right. But the challenge is that at some point the Fed is going to have to stop this bus, right? Right now, they're doing these outsized hikes of magnitude that we have not seen in a while, but the Fed isn't going to continue to raise by 50 or 75 basis points of meeting until inflation gets down to 2%, they have to try to time loosening a little bit on the brakes here so that the bus will eventually glide to a stop hopefully at 2%.

Now what does that mean? Does that mean the Fed can raise interest rates from where they're at right now between 2.25% 2.5% to, let's say, 4%? That's even on the more optimistic side of projections on where Wall Street sees the Fed stopping interest rate hikes at some point. They're going to have to, at some point, make the interest rate hike sizes smaller. And then at another point, stop the interest rates entirely and then possibly at some point maybe even cut interest rates.

Now how far in advance they need to do that as inflation comes down from 8.5% to 6% to 4% to maybe 2% without overshooting it or undershooting it, that's going to be a real challenge which the Fed is going to have to answer maybe in the later parts of 2023.

- And so all of this is to curb inflation right now from the Fed's activity and the policy decisions that have come forward at this point. And the economy continuing to really ingest all of the rate hikes that have taken place to this point. But then you think even more broadly internationally and where the Fed's activity and that policy here in the US also compares to some of the other activity and efforts to curb inflation. Citi is saying that the UK inflation could hit as high as 18% in January.

- Yeah. I mean, if you think it's bad here at 8.5%, if you heard 18% that'd be crazy, right? But we have to acknowledge that they are experiencing a lot of the same overall price pressures that the United States and a lot of other jurisdictions are feeling, which is specifically energy prices, right? And we know that it's specifically more pronounced in the United Kingdom because of how much more exposed they are to the Russia-Ukraine crisis where the off-lining of Russian oil has had a massive impact in spiked prices across the board.

But also, remember, that the United Kingdom is not a major domestic supplier of oil like the United States is, so their levers are not as easily maneuverable as they are in the United States, which is a reason why you're continuing to see those numbers increase. You have the likes of IAG economics saying, look, it clocked in as of the last reading at 10% far away from the peak. Although, interestingly, there's still saying that core inflation, which is when you exclude energy prices and food as well, they say the UK actually did peak.

So the divergence is actually happening here, and that's what makes it so challenging for the Bank of England. Andrew Bailey, the governor there, he's going to go likely with a 50 basis point interest rate increase. You might say, well, at 18% should you go more aggressive than that? But if it's all because of energy supply issues that are out of the BOE's hands, you've got to be very careful about that tightrope as well.

- Absolutely. Yahoo Finance's own Brian Cheung, thanks for breaking this down for us this morning. You said you were going to wear the Travis Scott's out there in Jackson Hole?

- Yeah. That plus the camo and maybe a safari hat. I might be the first person to try to pull that off.

- We need the lewks out there from Jackson Hole.

- Yeah. I got you.

- Thanks so much, Brian.