Staying on Message

Federal Reserve Chairman Powell delivered another forceful message to markets that an early pivot back to rate cuts will not happen until inflation is under control. However, is he still being too optimistic about how quickly this will happen and the economic costs to do so? Franklin Templeton Fixed Income CIO Sonal Desai shares her thoughts.

Another 75 basis point (bp) rate hike at the September Federal Reserve (Fed) policy meeting, and another forceful signal from Fed Chair Jerome Powell: “Our message has not changed at all from Jackson Hole.” At the Jackson Hole symposium in August, he had pushed back against market expectations of an early pivot back to rate cuts, emphasizing that bringing inflation under control will require a sustained period of tight monetary conditions. The message had been repeated by other senior Fed officials in the subsequent weeks, and markets had begun to listen, lifting expectations of the terminal policy rate—the policy rate at which the hiking cycle is expected to come to an end—and pricing out some of the rate cuts expected for next year.

Powell seems well aware that investors are still hoping for a dovish opening, and that the Fed needs to stay on message to avoid a market-driven loosening of financial conditions. Today’s press conference following the meeting included three important hawkish signals:

  1. The “dot plot”—a graphical representation of Fed’s rate trajectory—has become more realistic to us: the median policy rate for end-2022 has risen to 4.4%—a full percentage point higher than in June, Powell pointed out; the median rate for 2023 now stands at 4.6%.
  2. Powell noted that core personal consumption expenditures (PCE) inflation over the past three, six and 12 months has remained essentially unchanged above 4½%; underlying inflation gives no sign of coming down, notwithstanding monetary tightening and some slowdown in activity.
  3. Powell stressed that high inflation imposes severe economic hardship on the US population, especially on its most vulnerable citizens—pushing back against questions focused on the economic costs of projected higher unemployment.