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Great expectations: Jerome Powell faces one of his biggest tests as Fed chairman

By David Scutt

August 23, 2019 — 12.15pm

Jerome Powell is about to face one of his toughest assignments as US Federal Reserve chair, tasked with delivering a speech at the Jackson Hole Economic Symposium on Friday that could spark the wrath of both financial markets and Donald Trump.
To say the pressure on Powell is high is an understatement. One only has to look at expectations for the Fed funds rates and current asset valuations to see why he will have to tread carefully.
After cutting its funds rate for the first time in over a decade in late July, financial markets believe it’s a certainty that the Fed will deliver another 25-basis point easing when it next meets in mid-September. Beyond that, a further 75 basis points of cuts by the end of next year are fully priced in.
Expectations are high for a series of rate cuts, not a “mid-cycle adjustment” as Powell referred to the rate cut delivered less than a month ago.

Yet recent commentary from several Federal Open Market Committee officials seems to back Powell’s stance on the policy tweak, rather than the market's.
“As we saw from other FOMC members on Thursday, there’s several influential Fed officials who just don’t think that rates need to be cut again," said Greg McKenna, strategist at trading consultancy McKenna Macro.
“It’s going to be a really difficult speech that he’s going to deliver.”
Stocks could get 'whacked'

If Powell doesn't manage to deliver on market expectations, Mr McKenna says Wall Street could get “whacked”.

“Markets are in a double-bind because of where bonds are," he said. If [Powell] disappointed on rate cuts, there would likely be some repricing of the outlook for the Fed funds rate.  "Given the rally in 10-year bonds, we could get yields starting to rise as well.“
The combination of adjusted expectations about Fed funds and an increase in 10-year Treasury yields could "then go and whack the S&P 500 and other stock markets,” Mr McKenna warned.
Ray Attrill, head of foreign exchange strategy at the National Australia Bank, also expressed doubts as to whether the Fed chairman will be able to assuage financial markets.
“We presume Powell will want to convey an open-minded view about the outlook for monetary from here without pre-committing to any set course, but whether he will be suitably dovish enough for the market will be key to the market reaction,” Mr Attrill said in a note to clients.