Markets were expecting a hawkish tone from Fed Chair Jerome Powell prior to his speech at the Jackson Hole Symposium. Futures were pricing in a 90% probability for a cut as recently as Monday, falling to about 71% this morning. Then Powell gave markets want they wanted to hear with a single line, "...with policy in restrictive territory, the baseline outlook and the shifting balance of risk may warrant adjusting our policy stance." Bond yields fell as much as 10 bps across the curve in a matter of seconds and equities shot through the roof. The Dow hit a new all-time high and the S&P 500 is not far behind.

The quotes in which markets seemed less interested included Powell's allusion to the labor market in a "curious kind of balance," and "this unusual situation suggests that downside risks to employment are rising, [and] if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment." Other comments included, "It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed." Finally, "When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate."

Powell also outlined changes to the committee's monetary policy framework, most recently set forth in 2020, prior to the pandemic. In a nutshell, the 2020 changes were adopted as a means to not overreact to rises in unemployment. As a result, inflation spiraled to 9% in the summer of 2022, at which point the FOMC entered the fastest rate hiking cycle in history. The changes in framework for 2025 seem intended to re-balance the equation to a more even weighting between inflation and unemployment.

I'm not a PhD economist, but from where I sit, this seems counterintuitive to the market reaction with leading indicators for both components headed in the wrong direction. This puts the FOMC in a difficult position to move rates one way or the other in response to the next month of incoming labor and inflation data.

Meanwhile, President Trump continued his pressure on the central bank by threatening to fire current voting member Lisa Cook amid allegations of mortgage fraud from the FHFA. This move could potentially free up another spot for a Trump appointee after the unexpected resignation of Adriana Kugler earlier this month

KEY INDICATORS THIS WEEK

Consumer Sentiment - University of Michigan data showed consumers are still worried about inflation amid a continuing degradation in personal finances.

Next week - Q2 GDP revision, CORE PCE, personal income.