Fed Chair Powell remains committed to reducing inflation to 2.0%

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Published Date 8/25/2023

Markets started generally unchanged ahead of Jerome Powell’s speech beginning at 10:05 am ET. Last year Powell dropped a bomb on markets with very strong language that the Fed was going headfirst into fighting inflation. His firm stance took markets by surprise with his tone. This year the general view is a more relaxed Powell although we don’t expect him to take any victory laps over inflation, although inflation has come down over the last year, recent data suggests inflation may be difficult to break, oil prices increasing, wages holding firm, unemployment at 3.6% suggests full employment based on old definitions. Over the last couple of months investors and traders have come to the consensus inflation will not get to 2.0% for much longer than had been thought . Equally, a soft landing with no recession is also being baked in.

At 9:30 am the DJIA opened +178, NASDAQ +65, S&P +19. 10 year at 9:30 am 4.25% +1 bp. FNMA 6.0 30 year coupon -2 bps and -10 bp from 9:30 am yesterday.

Powell spoke for 15 minutes at 10 am ET. He gave no quarter to what he and the Fed have been saying, the Fed is set to push inflation down to 2.0%. The economy remains resilient, inflation lower but going forward may pose a threat. Wages high, the economy growing, jobs remain strong, he didn’t even hint that the Fed is finished but we expect the Fed will hold off more increases this year, but he did send the message he isn’t pleased with the current picture on inflation. The Fed Chairman said that the central bank is prepared for more rate hikes, though he also said that policymakers are able to "proceed carefully" when it comes to assessing incoming data. Mr. Powell said that the goal is to hold policy at a restrictive level until there is confidence that inflation is slowing toward the objective. He also acknowledged that the economy has not been cooling as expected, which could be viewed as a signal that more rate hikes are in the works.

More Fed officials coming, Loretta Mester, Cleveland Fed.

The initial reaction at the long end of the curve, the 10 year note at 11 am +3 bps at 4.27%; the 2 year note +8 bps to 5.09%.

At 10 am August final U, of Michigan consumer sentiment index, expected unchanged from mid-month at 71.2, confidence declined to 69.5.

Source: TBWS

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