As it does every year, the Federal Reserve Bank of Kansas City hosted the annual Economic Policy Symposium in Jackson Hole, where dozens of central bankers, policymakers, academics and economists gather.
Many economists expected a non-event. The latest inflation numbers suggested a fairly balanced message from Fed Chairman Jay Powell. However, his speech was interpreted as that of a hawk, i.e., resolutely oriented towards a longer and more important monetary tightening than the market had hoped for.
There is indeed a dichotomy between the Fed's projections and those of the market. For its part, the Fed intends to raise rates for a relatively long period of time with no intention of lowering them anytime soon. The markets, for their part, were expecting rate hikes in the very short term, which will give way to rate cuts as early as 2023. At this Symposium, it seems that Mr. Powell's intention was to convince investors that the rate cuts in 2023 currently expected by the market are too optimistic.
The market adjustment was almost instantaneous. On Friday, just after Mr. Powell's speech, the yield curve indicated that investors now expect the Fed to raise interest rates to 3.8% by February 2023, up from expectations of 3.3% at the beginning of the month. In terms of sequencing, markets now assign a high probability to the following scenario: 75 basis point hike in September 2022, 25 basis point hike in November 2022, December 2022 and February 2023. The first rate cut would not occur until late 2023 or even early 2024.