US Jackson Hole: steady policy, politics in play - SCB

Analysts at Standard Chartered Bank explained that both near and medium-term Fed policy will be in play at the Jackson Hole.

Key Quotes:

"We expect higher UST yields and stronger USD if gradual hikes remain ‘appropriate, for now’."

"Structural disinflation pressures, R* may play out on longer-term expectations."

"The theme of the Jackson Hole symposium on 23-24 August will be “Changing Market Structure and Implications for Monetary Policy”, focused on structural growth and inflation dynamics. We expect Fed Chair Powell to reiterate optimism on the economy and ongoing gradual policy rate hikes, retaining the phrase “appropriate for now” as a signal that two further 2018 hikes are suitable. He could indicate that the equilibrium long-term interest rate (R*) is slowly rising, in the Fed’s view. In this case, we would expect him to stress the need for evidence."

"Powell may also discuss evidence that technological and structural changes are sustaining disinflationary pressures. Less likely is that he will refer to Fed attention to emerging markets; instead, we expect him to emphasise that policy reflects US economic and financial conditions. The Fed probably will not be looking to end the hiking cycle, but does not want to fall far behind the curve. This may come across as somewhat hawkish relative to current market pricing."

"Markets have priced in about 40bps of Fed hikes through year-end, with the September hike more than 90% and December about 55-60% priced in. We expect any Powell comments at Jackson Hole on December Fed moves to elicit a stronger market response than a discussion of structural economic issues alone. Specifically, if Powell adheres to the “for now” terminology, last used on 17 July, investors could interpret it as a rebuff of presidential pressure. This could push market-implied December hiking probability higher, nudge up the short end of the yield curve and support the USD."