Fed’s Internal Divergence Goes Public, Expectation Management Becomes Urgent

Internal disagreements within the Federal Reserve over policy are becoming increasingly public. At the last interest rate meeting, Governors Waller and Bowman cast dissenting votes, while hawkish officials such as St. Louis Fed President Musalim and Kansas City Fed President Schmid continued to express concerns about upside risks to inflation. More notably, Chicago Fed President Goolsbee, traditionally seen as a dove, has shifted his stance, emphasizing that persistent service-sector inflation is "bad news" and arguing that the labor market has achieved "sustainable full employment." This internal division, coupled with political pressure from the White House, forces Powell to carefully balance competing demands at the Jackson Hole meeting.

Facing one-sided market bets, several top investment banks have issued risk warnings. Morgan Stanley explicitly pointed out that the stickiness of service-sector inflation has been underestimated by the market, and Powell may use the Jackson Hole meeting to send hawkish signals to curb overly optimistic expectations.

Meanwhile, Bank of America’s strategy team warned that if Powell leans dovish, it could trigger profit-taking and reiterated its recommendation to favor international equities. The team believes that as investors seek inflation-resistant assets and hedge against a weaker dollar, gold, commodities, cryptocurrencies, and emerging market assets will be the biggest winners.

Additionally, institutions generally advise investors to reduce portfolio beta exposure, increase non-dollar-denominated inflation hedges, and use derivatives to hedge tail risks.

Expectation Gaps Dictate Short-Term Moves, Long-Term Landscape Shifts

In the short term, the Jackson Hole meeting will serve as a catalyst for market volatility. If Powell’s tone leans hawkish—emphasizing inflation risks or the possibility of delayed rate cuts—it could trigger a pullback in U.S. stocks and a rebound in Treasury yields. If he maintains ambiguous rhetoric, the market may remain range-bound, awaiting guidance from September’s employment and inflation data.

In the long run, the Fed’s monetary policy normalization process will face greater challenges. The persistence of service-sector inflation may force policymakers to maintain higher interest rates for longer, reshaping global asset pricing logic. For investors, staying vigilant against the illusion of "perfect pricing," monitoring policy shift signals, and increasing inflation-resistant and diversified allocations in portfolios will be key to navigating uncertainty.