About the symposium… The Kansas City Fed welcomes dozens of central bankers, policymakers, academics and economists from around the world to its annual economic policy symposium in Jackson Hole, Wyoming. The symposium participants include prominent central bankers, finance ministers, academics and financial market actors. Participants meet to discuss the economic issues, outcomes and policy options related to the symposium topic. The symposium consists of papers, comments and discussions.

The 2022 Economic Policy Symposium, "Reassessment of Constraints on the Economy and Policy" will be held on August 25-27. Powell's speech will be on Friday, August 26.

Fed economic projections… After the minutes of the FOMC meeting were released last week, the markets are still cautious and divided in terms of saying anything about the final future of interest rate policy. While some committee members expressed their belief that the Fed will eventually reduce the magnitude of rate hikes; most members noted that efforts to reduce inflation will take more time.

In other words, the issue of how the perspective will be evaluated shapes the future interest rate expectations. Those who look at the recession window think that the Fed will slow down after raising interest rates for the last time in September and may start rate cuts soon. The stagflation window, on the other hand, voices expectations for more radical moves, as they think the Fed is still not tightening enough. If the Fed still feels that it cannot reduce inflation, it may keep on the table the possibility of engaging in more painful rate moves to "do whatever it takes", similar to the Volcker perspective in the 70s and 80s. In this regard, the fact that inflation fell in July on both consumer and producer basis compared to previous months provides some relief.

Comparison of Fed real funding rate and core PCE deflator

Inflation window and interest rate movements… Past inflation cycles show that the Fed has increased the federal funds rate above the current inflation rate in order to break the upward momentum of inflation. Doing so would be somewhat problematic, given the still low nominal interest rate and a core PCE deflator in the 5% range. Short-term interest rates higher than market participants' current consensus forecast are still a possibility. So Powell may not be as dovish as thought on Friday.

Pricing is being made for the Fed to increase the fed funds rate by 50 basis points at the September 20-21 FOMC meeting, whereas the implied interest pricing of the swap traders seen in the CME actually shows that we are somewhere in the middle between 50 and 75 basis points. It is expected to be followed by an increase of 25 to 50 basis points in early November and 25 basis points in December. After that, it will be expected that the Fed will take a break and analyze how the rate hikes it has carried out affect the economy. Swap traders pricing indicates that rate cuts may begin after May.

Conclusion? More light on the Fed's thinking is expected in Jackson Hole. Powell is expected to reiterate the Fed's commitment to policy tight enough to bring inflation back to 2%. While that doesn't rule out the possibility of the Fed moving towards smaller rate hikes at upcoming meetings, it will need to do so in a way that shows it's not backing down on its commitment to lower inflation.

Kaynak Enver Erkan / Tera Yatırım
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