Will Powell Channel Larry David?

Yesterday’s piece, equating the economy to a mattress (hard, soft, bumpy?), seemed to garner some attention and follow-up questions. The more I think about and discuss the likely outcomes for next week’s Jackson Hole meeting, the more I return to this concern: that Chair Powell will tell us to “Curb Your Enthusiasm”.

We wrote:

It hardly seems appropriate for Chair Powell to re-affirm [the market’s] likelihood [of more than three cuts this year] at his Jackson Hole address next week given that it would put him well ahead of the last Summary of Economic Projections just weeks before the next one is due. Remember, just two years ago he threw a big bucket of cold water on market hopes for a less restrictive rate path as the FOMC was busy raising rates.  

Someone correctly reminded me that most Jackson Hole conferences are relatively uneventful affairs for the stock market, yet I keep harping on the most recent exception to that pattern. Indeed, most of the time investors are in synch with the prevailing Fed policies. But now I think we’re not, just like in 2022. Remember, at that time the prevailing market hope was for a Fed “pivot”, but we were skeptical that Powell’s speech would acknowledge one:

If the parade of economists interviewed in the media are any indication, Chair Powell should come out forcefully with a discussion about further rate hikes and quantitative tightening.  Markets seem to be pricing in a cessation of rate hikes and a potential cut down the road.  From whom did they get idea, pray tell?  

And by the way, we’re STILL awaiting that pivot! We’ve gotten a rhetorical pivot, with the FOMC and Chair acknowledging the possibility and even the likelihood that rate cuts are imminent. But once again investors are ahead of the Fed.  

While that has been the case all year – remember the 6-7 cuts that were expected at the start of this year? – the stronger than expected economy made those cuts unnecessary. Fortunately. A strong economy is always better for stock prices than one weak enough to require aggressive cuts. Now that we are seeing signs of slowing, it is reasonable to hope for less restrictive monetary policies, and the Fed has not dissuaded us from that hope. But the hopes may need recalibration, and there is no better opportunity for Powell to do that than Jackson Hole.

This seems to be an out of consensus view right now. If folks were truly concerned, then we wouldn’t see VIX trading below 15. It appears few traders are willing to anticipate volatility or demand hedging protection ahead of Jackson Hole and the following week’s Nvidia (NVDA) earnings. I guess the market is more willing to view Powell in his more typical “Goldilocks” role than as a curmudgeonly Larry David.