Markets are correcting ahead of Jerome Powell's Jackson Hole speech, which could define his legacy and set the long-term direction for US interest rates.
A bold scenario could see Powell raising the Fed’s inflation target to 3%, justifying it with American exceptionalism (in GDP growth terms, America is more akin to a developing nation).
A new inflation rate target would appease Trump, but also serve him with a politically "hot potato": higher institutionalized inflation, and more expensive long-term financing for US Debt.
Raising the inflation target could boost equities but hurt US dollar and debt credibility, while reaffirming 2% would allow only modest rate cuts.
I see an increase in target inflation as the only technically and politically viable option for the Fed to cut rates in the current macro context. I still do not think it is a very likely scenario. I remain bullish on equities.
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