By Borislav Vladimirov, Goldman trader and managing director
In a declining nominal growth environment, where cash yields 135 basis points per quarter, the outcome of a tightening versus easing policy is an important factor that makes a difference to cross-asset return expectations.
Most analysts anticipate that at Jackson Hole central bankers will reiterate a "job not done" message, indicating the need for an extended period of tighter monetary policy. This implies the intention to raise further short-term real interest rates (even by being on hold as inflation slows further), despite a noticeable reduction in inflationary pressures and poor PMI readings and maintain those until a clearer evidence of building labor market slack. This is what we call here the Volcker scenario - a decisive win against inflation, whatever it takes. (55-70% market implied probability)
