In the lead-up to the annual Jackson Hole symposium, financial institution Standard Chartered has shared its expectations regarding the stance of Federal Reserve Chair Jerome Powell. The bank foresees Powell reaffirming his commitment to maintaining higher interest rates for an extended period. Rajat Bhattacharya, Senior Investment Strategist at Standard Chartered, discussed these expectations in an interview with CNBC-TV18.

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Bhattacharya said, “Powell is in a tight spot, I say that because while he needs to keep rates high as he had (inflation) data, but the latest PMI data this week shows a slowdown in US growth. This suggests that growth and activity is slowing, even during the summertime when we were expecting a lift up in consumption. So he is in a tight spot, he has this data coming through which is weaker than expected.”

Bhattacharya pointed out the persistent issue of elevated inflation, which continues to surpass the Federal Reserve's targeted levels. Bhattacharya speculated that Powell is likely to adhere to a data-centric approach for the time being.

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While not committing definitively, Powell is expected to underscore the need for extended higher rates. He added that markets have already factored in this expectation, underscoring the importance of whether Powell acknowledges the recent PMI data during his upcoming speech.

Turning the conversation toward the trajectory of the bond market and equities, Bhattacharya underscored the interconnected nature of bond yields, the US dollar's performance, and equity markets. Notably, bond yields recently retraced from the 16-year highs reached within the past week, shortly after the release of the PMI data. This data-driven pullback had a visible impact on the direction of yields.

Addressing the potential market reaction if Powell's rhetoric is not as overtly hawkish as some anticipate, Bhattacharya noted that Powell needs to adhere to the strategy of maintaining higher rates for an extended period to counter inflation.

However, failure to deliver a more hawkish surprise might result in bond yields stabilising within their current range or even experiencing a slight decline. Such a development would likely contribute to a depreciation of the US dollar, subsequently bolstering equity markets in the aftermath.

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(Edited by : C H Unnikrishnan)