All eyes are on the resort town of Jackson Hole in Wyoming on Friday as the US Federal Reserve meets to discuss the key word of the financial year: inflation.
The meeting between leading central bankers and other experts is likely to consider whether enough has been done to get on top of inflation, and how far they should go in raising rates and reversing the massive bond-buying over the last two years.
Federal Reserve chair Jerome Powell is expected to deliver a wide-ranging speech at 10.00am ET on Friday that will include his expectations for inflation, and his comments are likely to dictate whether the hawks or the doves will take hold in the markets.
READ: US markets rally ahead of Friday's Fed comments
“This year, Jackson Hole may have a bigger-than-usual impact on investor sentiment, as investors don’t really know where the market is going, as the market doesn’t really know where the Fed is going,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
To fight runaway inflation, US rate-setters have raised interest rates aggressively through the year but it remains hard to tell if they are winning. Inflation remains stubbornly at levels not seen in 40 years even though there have been some signs that price pressures may be easing. The spate of rate hikes, however, is threatening economic growth, and many fear that the world’s biggest economy will slide into a recession.
“The July equity rally was mainly triggered by the expectation - and not the fact, nor an announcement - that the Fed could soften its policy and start cutting the interest rates if the US economy sinks into recession,” noted Ozkardeskaya.
Fighting inflation at the expense of economic growth
If Wall Street's choppy performance this week is anything to go by, investors are clearly anxious about what’s to come from Powell’s speech.
Exinity Group chief market analyst Han Tan noted that declines in equities and bonds of late suggested that Powell would strike a hawkish tone to fight rampant inflation at the expense of economic growth.
“If Powell’s commentary forces markets to further price in more supersized Fed rate hikes, that might trigger more declines for equities and gold, while king dollar would continue to exert its dominance across the FX universe,” Tan said.
However, if Powell appears more dovish than envisaged, adopting a more cautious tone over the US economic outlook could signal that the Fed will back off from larger rate hikes and potentially allow risk assets to resume their summer rally, Tan added.
Bearish or bullish?
Lisa Shalett, head of the global investment committee at Morgan Stanley Wealth Management, told CNBC that investors are underestimating inflation, growing recession risks, and earnings expectations that will have to come down at some point.
“This bear in our view has one last act,” Shalett said.
Analysts are pegging the next hike in September to be around 0.75%, or 75 basis points.
Nevertheless, Charles Stanley chief investment commentator Garry White is calling for “introspection and retrospection” from the central bank.
“What was a necessary and major response to lockdown in 2020 became an extended experiment with large monetary stimulus which some think helped fuel the subsequent inflation.”
Contact Angela at angela@proactiveinvestors.com
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