Fed Hikes: Kohn Day or Bernanke Day?

Bank of America's research report has shed light on the internal debate within the Federal Reserve over the rate hike pathways. The Fed Chair, Jerome Powell, made a hawkish speech at Jackson Hole, causing markets to reprice the probability of a September rate hike. This was followed by Governor Waller's dovish remarks later that week, delivering a sharply contrasting signal.

Using an analogy between former Vice Chairman Kohn's and former Chairman Bernanke's hiking styles, Powell posed a question: 'Is today Kohn Day or Bernanke Day?' The Bernanke path involves slow, preemptive rate hikes, while the Kohn path involves waiting longer and hiking faster and more aggressively once inflation worsens.

BofA believes that Powell's hawkish stance essentially tells the market that the baseline path has shifted to the Kohn track. However, this creates a communication paradox, as Powell was forced to provide more directional guidance than expected to repair the reputational damage from the July press conference.