Inflation is the number one enemy and priority. That's the key takeaway from what we have heard from Fed and ECB policymakers at Jackson Hole since the weekend. And markets are responding in kind.
Equities were routed on Friday and are soft again today while the dollar is pushing higher across the board after observing modest gains at the end of last week. The bond market was unenthused at the time but we are seeing yields creep higher today. 10-year Treasury yields are up 8 bps to 3.12% and nearing fresh two-month highs:
Fed chair Powell's speech wasn't overly hawkish but it was clear and concise. The Fed will stick with a resolute approach in countering inflation and his remarks were backed up by Mester here. Odds of a 75 bps rate hike in September now stand at ~76%.
Meanwhile, the ECB looks to be trying to tee up a 75 bps rate hike next week as I bet policymakers in the region are realising that their window to tighten may be closing - even if they are adamant about "hiking into a recession".
The key thing to be mindful about when looking at this is that the talk about central banks tightening policy further in the wake of slowing growth is largely built around the premise on a so-called soft landing.
That's what both the Fed and ECB are angling towards but the latter has its work cut out for them amid soaring energy prices in Europe heading into winter. That said, the Fed doesn't have it much easier with growing socioeconomic pressures and if we do see stronger recession risks seep in, can the Fed really ignore that? In essence, the Fed pivot will revolve around that debate now.
We're still in the early days of course but make no mistake, we're now in the second-half of the tightening cycle. It's all about if central banks can keep fighting the "good" fight against inflation. The issue here is that the harder they run at that, it could very well double-down and hurt a slowing economy even more.
You can take the UK for example. Amid soaring energy prices where in some cases people might end up paying more on electricity than they do for mortgage in a month, higher interest rates is just compounding the woes for those households/borrowers.