While at the conference after the last FOMC meeting in July, Jerome Powell sounded a bit more “dovish”, so investors could read from the words of the Fed chairman the signals that heralded the removal of the foot from the brake pedal in terms of the pace of monetary policy tightening, last Wednesday the situation slightly improved changed after publication of the minutes of the July FOMC meeting. Federal Reserve officials judged that there is not enough evidence so far that inflationary pressures are waning. To slow it down effectively, it may be necessary to force the economy to slow down, and thus deliberately bring it into recession. If we use the official definition (two consecutive quarters of negative GDP), this one is a fact.

What is the market looking for in particular?

It is worth recalling that in terms of the calendar, the symposium in Jackson Hole is planned almost exactly between the two FOMC meetings. The latter took place at the end of July, and the next one is scheduled for the end of September. There is no meeting in August, so Jerome Powell’s speech will de facto fill this gap. We should also remember that at the press conference following the Federal Reserve’s decision in July, Powell signaled, inter alia, departure from long-term forward guidance in favor of a more flexible response to current changes in the economy. In such a situation, it may turn out that we will get to know some new details within a few days, which were not discussed during the July meeting.

What’s next for QT?

According to the Fed’s original announcements, a reduction of the balance sheet at the rate of USD 47.6 billion per month was to begin in June, to accelerate to USD 90 billion in September. In fact, the reduction started a bit earlier, already from mid-April. Since then, the Fed’s balance sheet has shrunk by $ 115 billion. Thus, significantly less than it was suggested from earlier declarations.

It can be assumed that the Fed is trying to reduce the balance sheet as much as the market conditions allow, and thus above all the profitability of debt. Although the situation has started to calm down a bit since the middle of May, after a rapid, earlier increase, in recent weeks those who are counting on increases in bond prices have again had a problem. We should remember that many observers counted on yield drops due to the announcement of a slowdown in inflation (as a result of the economy entering a recession). In addition, the technicians could use the classic head and shoulders inversion formation.

As you can see, the fall below the neckline turned out to be only temporary, after which the profitability returned above the exceeded support level. Technically, such a move is referred to as a classic trap, the consequence of which should be a move in the opposite direction (in this case, a further increase in profitability). In this way, the debt market may signal that it is again tilting towards the more hawkish rhetoric that flowed from last week’s minutes of the FOMC meeting.

How many concerns are in prices?

As always with this type of combination, and thus a visible increase in risk aversion in the markets and heading towards an event that the market is afraid of, it is worth asking yourself how this event will further affect price behavior. More precisely, or by chance it will be the case that even the hawkish tone in one of Powell’s upcoming statements will not be used by some players to “sell the facts”. What if Powell doesn’t turn out to be as dangerous as the market seems to be discounting in recent days?

Therefore, let us bear in mind that when the market clearly loses in anticipation of some supply event, often the materialization of such an event is a turning point and the appearance of a relief. As a rule, the path of further interest rate increases is known (around 3.50% by the end of the year), and with the balance sheet reduction, everyone can see how (not) it is going. So the question is, what hawks and new elements in such conditions would Powell still add to the market? The space for further, firm tightening of the screw seems to be very limited. Hence, fears of the Jackson Hole symposium may turn out to be “a large cloud from which a little rain will fall.”

Tomasz Gessner