Will Powell's speech focus shift? That's the key!

Federal Reserve Chairman Powell's speech may no longer be about further shaping market expectations, but more about assessing the current state of the economy in preparation for what he calls a "key" first step.

Former Federal Reserve Vice Chairman and current Global Economic Advisor at Pacific Investment Management Company (Pimco), Richard Clarida, said, "I don't think he needs to do too much after the July press conference," indicating a leaning towards a rate cut at the September meeting.

Clarida said, "You won't hear 'mission accomplished,' but he may review the past two years, where we came from, where we are now, and acknowledge that they are close to containing the most severe inflation outbreak in 40 years."

Former Federal Reserve staff, policymakers, and external analysts suggest that Powell is likely to return to his explanatory norm, perhaps outlining in broad terms how the Fed will handle the upcoming easing cycle or delve into the lessons learned over the past two years about the causes of inflation and solutions.

William English, professor at the Yale School of Management and former head of the Federal Reserve's Monetary Affairs Division, said, "He believes that a general framework for a rate cut strategy is needed at this time."

As Federal Reserve policymakers will update their interest rate forecasts for this year and 2025 at the next meeting, Powell does not want to provide detailed forward guidance, which in itself carries risks as it could trigger market reactions or future data could push policy in another direction.

"Instead, Powell may provide some background information to let the public and the market understand how the Fed will respond to changes in the economy," English said. "What if the economy doesn't evolve as we expect? What does that mean for policy? What conditions would prompt us to speed up or slow down?"

Powell and other Fed officials increasingly like to describe different economic scenarios, a strategy that allows them to provide a baseline outlook while conveying uncertainty and explaining how different outcomes might prompt their responses.

For example, some are beginning to worry that the economy may be at a turning point, with the unemployment rate potentially rising rapidly enough to disrupt what they thought could achieve a "soft landing" from inflation.

Antulio Bomfim, former special advisor to Powell and current Global Macro Head at the Fixed Income Team at Northern Trust Asset Management, agrees that Powell may steer clear of short-term guidance and instead discuss broader issues—perhaps trying to capture the recent Fed experience and how upcoming labor and inflation dynamics may differ from pre-pandemic times.

"We are at a policy inflection point, which may also be an economic inflection point, and inflection points are very difficult to navigate," Bomfim said.

Bomfim added, "In recent years, because inflation has been such a priority, the Fed's actions have been more like those of a single-minded central bank, and now we are not only transitioning from hiking to cutting rates but also transitioning to what I call a more normal state." **”