Federal Reserve Chair Jerome Powell was in something of a no-win situation heading into this past weekend.

Last week, the U.S. yield curve from two to 10 years inverted for the first time since 2007, putting a potential recession on the top of everyone’s minds. By the end of the trading day on Aug. 16, fed funds futures were pricing in more than 50 basis points of Fed interest-rate cuts by the end of October. In other words, traders were betting on either back-to-back quarter-point reductions in the coming two months or that central bankers would slash rates by a half-point in one fell swoop. 

The Fed, by all accounts, is not contemplating such drastic measures. The Federal Open Market Committee minutes from its July meeting, released Wednesday, made clear that officials didn’t see last month’s interest-rate reduction, the first in more than a decade, as the beginning of an extended cycle of cuts. Bond traders, of course, don’t believe that for a minute and have repeatedly pushed Treasury yields to new lows in the wake of the July 31 decision. They reckon that President Donald Trump turning up the temperature on both the trade war and the central bank, plus persistently weak economic data globally, will force policy makers’ hands.

That might very well end up happening. But the Fed seems reluctant to back down on its assessment from just three weeks ago so quickly, and it doesn’t want to put its leader in the impossible position of navigating such a wide gap in thinking between policy makers and bond traders as he takes the stage in Jackson Hole, Wyoming, on Friday. 

So they released the hawks.

First, it was Boston Fed President Eric Rosengren on Aug. 19. He voted against cutting interest rates at the July meeting. In an interview with Kathleen Hays on Bloomberg Television, he said he’s not convinced that slowing trade and global growth will significantly dent the U.S. economy. “Just because other countries are weak, if we’re strong, it doesn’t necessarily mean we should be easing as well,” he said. And he dismissed the inverted curve, saying it’s the central bank’s job to get inflation and unemployment right, not yield levels.

Then on Thursday, it was a one-two punch of Kansas City Fed President Esther George, who also dissented, and Philadelphia Fed President Patrick Harker. George said: “As I look at where the economy is, it’s not yet time. I’m not ready to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker.” Harker chimed in along the same lines: “I think we should stay here for a while and see how things play out.”

There’s only so much hawkish Fedspeak that bond traders can take. Two-year Treasury yields rose to the highest level in more than a week. Rate-cut odds, predictably, fell relative to the end of last week. Fed funds futures are only pricing in 42 basis points of easing by the end of October, so not quite two quarter-point reductions. It now looks more likely that the Fed will cut its benchmark lending rate just twice by the end of the year, rather than possibly three times (assuming a quarter-point drop at each meeting).

To be fair, these are some of the most hawkish Fed officials, and they don’t represent the broad view of the 2019 voting group. But two are voting members, and everything the central bank does is by design. These comments, ahead of Powell’s speech, should serve as a signal that whatever markets were pricing in at their extremes was way too far ahead of what the Fed sees and that the central bank will push back against such expectations. 

Powell, for his part, has a poor track record of boosting markets with his speeches, and my guess is he knows it. The S&P 500 Index fell after each Fed meeting last year with a press conference. He’s done somewhat better this year. Notably, though, stocks dropped more than 1 per cent after the July 31 decision, the biggest decline since the end of May.

His job, of course, is not to buoy equities. But with the level of scrutiny on his remarks at the Kansas City Fed’s Economic Policy Symposium, there’s no way the comments won’t be viewed through the lens of the financial markets. These hawkish comments pushing back against the idea that the U.S. is in dire need of lower rates, in addition to the meeting minutes reiterating that July was an “insurance cut,” should have traders bracing for something from Powell along the lines of what’s he has said for a while: That the economy is in a good place and that the central bank will act as appropriate to sustain the expansion. He may hint at a quarter-point cut in September, but he is tasked with consensus-building, and right now it’s clear there’s a growing divide within the central bank about whether they need to further ease monetary policy.

The markets might not be perfectly teed up for Powell, but they’re a lot closer to the mark than they were a few days ago.