All Eyes on Jackson Hole

Rates rise ahead of Powell day. Swap rates and Treasury yields rose across the curve today, forcing the 2-year yield back above 5% after a one-day hiatus. The move was spurred by Fed speakers that suggested rates could be held at current levels for the foreseeable future. On the other hand, durable goods orders came in at -5.2% from 4.6% last month, which forced rates lower in the morning before the afternoon sell-off. Meanwhile, the S&P 500, NASDAQ Composite, and DJIA fell on the day, with the DJIA extending lows not seen since early July. 

Final steps to tame inflation may become more clear tomorrow. Tomorrow’s Jackson Hole economic symposium will include comments from Chair Powell, where many expect him to map out the final steps in the current tightening cycle. At this point, the Fed is in a challenging spot – it needs to decide how much more tightening is needed even as the impact of tightening up to this point is still unclear. Former Fed Vice Chair Kohn remarked, “He will caution against easing too soon…,” and noted it would be welcome if Powell better defined data-dependency which could manage strong market reactions recently to individual data points. Chair Powell will speak tomorrow at 10:05 AM. ECB President Lagarde will also speak later in the day.  

A potential increase to the Fed’s neutral rate. The Fed’s neutral policy rate in a post-cycle world is in question, where some believe that sustained inflation could require rates to remain elevated in the long-term. The impacts are currently unknown by broader markets and Fed officials, including Chair Powell, who in March said that “Honestly, we don’t know” where neutral is. Fed President Williams was skeptical of the long-term increase, stating “Importantly, there is no evidence that the era of very low natural rates of interest has ended.” A rise in long-term neutral policy rates could imply that the rate cycle has not been as restrictive as currently understood.