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How the Fed ‘could trigger carnage in the bond and equity markets’ this week

Scott Gamm

The one bright spot in the economy, the strength of the U.S. consumer, could throw a wrench in the Fed’s messaging this week, as central bankers gear up for an annual policy conference in Jackson Hole, Wyoming.

“There is a risk [Fed Chair Jerome] Powell and his colleagues end up disappointing the bond market next week – by not signaling clearly enough that additional rate cuts are coming in mid-September and beyond,” Paul Ashworth, chief U.S. Economist at Capital Economics, wrote in a note to clients. “That could trigger carnage in the bond and equity markets.”

Just last Thursday, July retail sales were released, a key data point on consumer health. Retail sales rose 0.7% month-over-month, topping Wall Street’s estimates of 0.3%. A strong consumer may fuel the Fed to delay future rate cuts.

“While the incoming global data have been weak, the latest round of U.S. data would not seem to warrant another rate cut so soon; not with core inflation rebounding and the U.S. consumer seemingly hell-bent on single-handedly saving the world economy,” Ashworth wrote.

Federal Reserve Chair Jerome Powell holds a news conference following the Federal Reserve's two-day Federal Open Market Committee Meeting in Washington, U.S., July 31, 2019. REUTERS/Sarah Silbiger

Powell is set to speak at Jackson Hole on Friday, almost a month after his tumultuous press conference on July 31. Even though Powell cut interest rates, which market participants had expected, he sent mixed messages, leaving investors wondering if the cut was “one and done” or the start of a more substantial easing cycle.

Since then, trade tensions between the U.S. and China have arguably worsened and the yield curve inverted, which historically has preceded a recession. Investors are looking to the Fed to cut interest rates to help “un-invert” the yield curve.

Meanwhile, Jackson Hole commentary this week isn’t the only Fed checkpoint this week: the minutes of the Fed’s July meeting are released Wednesday.

“[The minutes] could also be a big market mover if they show officials were resistant to multiple rate cuts,” Ashworth added.

Federal Reserve messaging uncertainty

While Ashworth highlights the market risk of a more hawkish-than-expected tilt in the Fed’s messaging this week, he acknowledges the uncertainty in forecasting the Fed’s messaging because, “Fed communication has become woefully bad.”

“The collective inexperience on the FOMC has begun to show – with the Fed pushing ahead with a rate hike last December amid a full-blown equity market collapse and then reversing it with the stock market close to a record high,” he wrote. “It’s also possible that Powell will simply drop all talk of a mid-cycle adjustment next week and bow to the market’s wishes.”

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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