Special Edition: 46th Economic Symposium From Jackson Hole

By Lyon Wealth Management on August 28, 2023

Why Jackson Hole is Noteworthy

Every year, the Kansas City Fed hosts central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium in Jackson Hole, Wyoming. This year’s event is titled, “Structural Shifts in the Global Economy.”

The attendees, which include Fed Chair Jerome Powell and other Fed members, release informative papers and participate in media interviews throughout the event in Jackson Hole, providing insight into future policy decisions and developments.

Bond Markets: Low Volatility, Rising Yields Ahead of Jackson Hole

Leading up to Jackson Hole, bond markets tend to be quiet as investors await signals from the event, however, weaker than expected PMI data caused a rally across the curve ahead of the speech.

Chart 1: Two Year Treasury Yields¹

Powell held a hawkish tilt and remained consistent with the Fed’s 2% inflation target, remarking, “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so.” This is indicative of further restrictive policy and a continuation of “higher for longer” rates while the Fed remains data-dependent. The Fed is focused on executing a soft landing by creating price stability without spiking default risk or causing economic activity to crater. The Fed maintains flexibility due to the consistently tight labor market, which supports the consumer, and continues to focus on key inflation datapoints like services, ex-housing.

While remaining steadfast in the fight toward 2% inflation, Powell noted favorable Core PCE readings in June and July reinforce the Fed’s confidence that inflation is moving down sustainably toward its goal. However, it remains unclear “the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters.”  Importantly, Core PCE data will be released next week. Expectations are for an acceleration to 4.2% from 4.1% in July.

Chart 2: Inflation Data Lower, Fed Looking for Sustainability of Trend Towards 2%²

This year it is a bit different in the bond market as bond yields have rallied due to the stronger economy, more supply from the Fed as it implements QT and Japan’s change in its monetary policies to end yield curve control. The 2-year Treasury yield has risen 65 bps YTD, 14 bps QTD and 131 bps off the March lows. Inflation has retreated, but sticky components remain as companies continue to implement pricing power strategies, an upside inflation risk. While the Fed is in its ninth inning of rate hikes, the yield curve is starting to anticipate a “higher for longer” scenario, and prices are reflecting a higher supply of Treasury securities.

Reaction to Jackson Hole and Updated Expectations

Policy decision making will continue to hinge on incoming data. The probability of a 25 bps hike by the November meeting jumped from 52% as of Thursday to 65% following Powell’s remarks. Further, the 2-year Treasury sold off, rising 3 bps, while the 10-year rose 1 bp during Powell’s speech. 

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¹Source: FactSet (chart). As of August 25, 2023.

²Source: FactSet (chart). As of August 23, 2023.