Fed's Powell will struggle to not shake the markets Friday

Fed President Jerome Powell faces the difficult challenge of presenting a unified voice on Fed policy in the Fed's most divided years. This could create volatility if it does not guarantee markets that the Fed will continue to reduce its interest rates.

Powell will speak at the Fed's annual Jackson Hole symposium at 10:00 am ET Friday in front of an audience of central bankers and economists. His speech comes as the Fed and Powell are under the unprecedented siege of an angry president and are also losing the confidence of fearful markets.

"He is in a difficult situation, his committee is divided, he is under a lot of pressure from the president, and more importantly, the US data has been relatively resilient, which does not provide him with a lot of reasons to alleviate significantly, "said Mark Cabana, head of US short-rate strategy at Bank of America Merrill Lynch.

On Thursday morning, federal fund futures had ratings of more than 90% for a 25 basis point rate cut at the September meeting and between one and two further quarter point cuts between this date and the end of the year.

"I think Powell will try to understand how the committee looks at the outlook," said Cabana. "He might seem more dovish himself, slightly more worried, but I do not think he'll feel comfortable to commit to lightening, and that's what the market wants to hear.I think the risks are that the Fed could disappoint. "

Economists say the Fed is divided between those who need to see evidence that the US economy has eroded and those who want to protect it from headwinds from weakness elsewhere in the world. According to the minutes of the Fed's July meeting, two members want the Fed to lower interest rates further by 50 basis points; two dissidents who did not want a cup at all, and a few other non-voting members who did not want the Fed to act either.

"They remain convinced that the economy must collapse before they want to relax.I think this is not the right vision," said Michael Gapen, chief US economist at Barclays. Those who oppose a reduction in rates "seem less inclined to accept the argument that if they do not relax, they will tighten up," he said.

Philadelphia Fed President Patrick Harker told CNBC Thursday that he did not see the need for a further cut. Although Mr. Harker is not a voting member, his comment added to the negative sentiment of the market and the fear that the Fed will act aggressively enough to prevent the economy from sinking into recession.

A report revealing Thursday that the manufacturing sector contracted for the first time in the United States since the financial crisis added to the negative sentiment. Markit PMI manufacturing data fell to 49.9. Below 50 brands down activity.

"The rest of the world looks fragile, if we do nothing, the dollar will appreciate and imports will tighten," Gapen said.

Gapen said the minutes of the Fed meeting confirmed the already well-known division of the Fed. "There were probably five or six who did not want to move, and I would say it's Harker, [Atlanta Fed President Raphael] Bostic, [Richmond Fed President Tom] Barkin [St. Louis Fed President Esther] George, [Dallas Fed President Rob] Kaplan and [Cleveland Fed President Loretta] Mester, "he says.

Policymakers said that the more the Fed disagreed, the more uncertain markets were about politics and now they are convinced that the Fed may not be able to exit the recession. As a result, the widely observed 2 to 10 year yield curve has reversed briefly a few times over the past week. Other parts of the curve are already inverted, which means that the short-term yield has exceeded the long-term return. This is considered a reliable signal of recession.

"He just needs to make sure everyone else who wants to calm down will vote with him," said Gapen. "The market is of the opinion that the rest of the world has a horrible face.They think that US policy needs to be relaxed … and for whatever reason, they think the Fed is forced to Fed, that this either by his internal division or by the policy against him. "

Powell said the Fed would act appropriately in the face of global weakness, trade war concerns and stubbornly low inflation, in anticipation of the Fed's quarter-point cut in July. . However, his comments after the July meeting that the Fed was making a "mid-cycle adjustment" or a reduction in insurance to counter the weakness shook markets looking for a more aggressive rate-cutting cycle from the US. from the Fed.

"If the Jackson Hole speech is not the subject of a" mid-cycle adjustment ", people will interpret this as an open door to more cuts, instead of two or three", said Gapen, who is expecting three further cuts by the end of the year.

Economists also expect Powell to discuss the weakness of inflation and a proposal allowing inflation to move in a wider band on both sides of its goal. inflation of 2%.

John Briggs, head of strategy at Natwest Markets, said Powell should highlight the three reasons the Fed was behind the rate cut in July when the minutes of its meeting were released.

Powell should mention "the business sector, the risk management perspective given the overall outlook and the outlook for inflation, and indicate how they always monitor the risks and that they will react as needed", said Briggs.

Powell could still create volatility when he speaks. "He's coming out and he's a hawk and dovish," said Briggs. The market reacted after the last Fed meeting because it had issued a dovish statement, Briggs said, before giving a hawkish press conference.

Powell should strive to maintain a balance between options, while stressing that he is willing to lower rates if the US economy deteriorates and also as a precautionary measure.

"The risk is that Jay Powell will eventually disappoint the markets by not committing enough to a rate cut in September because he can not commit," said Diane Swonk, chief economist at Grant. Thornton. "The national economy shows some improvement.We are seeing strong consumers, a still weak manufacturing activity, still weak investments.This is the dilemma we face … The division lies between the traditionalists who want to stay in their country ". their own way, which is geared towards the country. They do not want to be a world Fed. They do not want to be on the world road. "

Powell can give the appearance of calm when he slips in front of the Jackson Hole cameras. In fact, Gapen said, the last time the Fed sparked so much internal dissension dates back to 2011, when former President Ben Bernanke advocated a long period of low interest rates and unorthodox easing programs during the financial crisis. At the time, three members were dissenting.

Fed observers say it's hard to say how much there was a lack of harmony in the Fed's previous advice because the Fed was less transparent than in the past, and Other Fed presidents may have been more successful in controlling disagreements. Cabana said that former Fed chairman Janet Yellen had met with two dissidents in December 2017, during a meeting at which the Fed had raised its rates.

Gapen said the political pressure on the Fed in the past has been exercised by Congress, especially when he questioned the Fed's growing record. But now, the Fed and, personally, Powell, face mounting attacks from President Donald Trump, who says the Fed has been slow to cut rates.

This makes Powell's job even more difficult, and the Fed chairman has made it clear that he sees the Fed as independent and that he will not resign or leave until the end of his term.

"It's hard to paint a picture of a consensus when there is none," Swonk said. "The consensus is very fragile."