Federal Reserve Chair Powell used the opportunity that Jackson Hole provided to send a more forceful, hawkish message regarding the medium-term outlook for monetary policy. The rates market bear flattened in reaction. Economists at TD Securities expect to see more flattening ahead.

Fed will continue to tighten policy over the coming months

“Fed Chair Powell used the opportunity that Jackson Hole provided to send a more forceful, hawkish message regarding the medium-term outlook for monetary policy. The chairman broadly aimed his remarks to put to bed the idea that the Fed will be soon done with its tightening cycle and then following that up with rapid rate cuts as the economy shows additional signs of weakening in 2023.”

“We continue to look for the Fed to slow the pace of rate hikes in September to 50 bps, however, a larger 75 bps increase is on the table and will hinge on upcoming economic data.”

“The market is pricing in about 60% chance of a 75 bps hike in September and a terminal rate of 3.8% by early-2023. The market pared back some 2023 cuts, but pushed those cuts further out in time. This explains the flattening in the curve, and we think that the curve remains biased to flatten further until there is compelling evidence of a decline in inflation.”