Powell might be a bit more hawkish than his Fed colleagues on Thursday

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Federal Reserve Chairman Jerome Powell may be more hawkish in his speech Thursday, at least relative to some of the speeches by his colleagues, economists said.

“I don’t think Powell will take a definitive position as some on the FOMC have taken that interest rate hikes are behind us,” said Avery Shenfeld, chief economist of CIBC Capital Markets.

The Fed held rates steady at 5.25%-5.5% at their meeting in September but penciled in one more25 basis point rate hike at either the November or December meeting.

Shenfeld said he was puzzled why many Fed officials seem to be backing away from this forecast at the same time the economic reports have delivered upside surprises to growth in the July-September quarter.

The Fed’s forecast of a slowdown ahead “sound like a broken record in which the slowdown is always a quarter ahead,” he said.

Powell will participate in a “conversation-style interview” at an Economic Club of New York on Thursday at noon Eastern.

Markets will be keen to hear Powell’s discussion about the recent run up in the 10-year Treasury yield
which has risen about 90 basis points since July.

Robert Brusca, chief economist at FAO Economics, thinks that the rise shows that bond investors are starting to doubt the Fed’s inflation-fighting prowess.

“They all seem to have this kind of gravity model view of inflation that says ‘well they don’t have to do very much because inflation is going to fall by itself to 2% because that’s where it was’,” Brusca said.

“I don’t trust it and I think the markets are showing signs they don’t trust it,” he added.

Shenfeld disagreed, saying the rise shows that the market “is buying into what the Fed said at the last meeting,” which was that rates will have to stay high for longer to get inflation down.

But Shenfeld said there are clear divisions at the Fed. He said this is best viewed by looking at the Fed’s forecasts for interest rates at the end of 2025 which, he said. are “are all over the place.”

“There was a very divergent set of views, which is understandable given that we’re getting ambiguous signals with cooling inflation and not a cooling of growth,” he said.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said Powell will agree with some other Fed officials who have said the Fed can pause in November and that the bond market is doing some of its monetary tightening for them.

On the other hand, Powell will have to strike a relatively more hawkish tone about December given the recent batch of data “that does seem to increase uncertainty about how much progress they are making” on growth, labor market and inflation,” he added.

The September retail sales report showed two solid months of gains, casting doubt on the Fed’s expectations of slower growth in the October-December quarter. Core consumer inflation data has also picked up from the summer months. And third quarter GDP growth is tracking at a 5.7% annual rate according to S&P Global Market Intelligence. The Commerce Department will release its first estimate of third-quarter growth next week.

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