Powell’s Jackson Hole speech only reinforced the importance of data in determining policy for 2024.
In a highly anticipated speech at the annual Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell signaled that despite June and July’s softer inflation prints, inflation “remains too high” and that the Fed is “prepared to raise rates further if appropriate.” We believe Powell clearly articulated the two-sided nature of the risk that the Fed faces in the current environment: acknowledging that while more hikes may be needed to effectively anchor inflation to the target rate, the Fed runs the risk of overtightening which could have meaningful negative implications for growth, credit conditions, and ultimately employment and the consumer.
Coming into Jackson Hole, there was significant speculation Powell would potentially telegraph the Fed’s willingness to accept a modestly higher target rate of inflation. Instead, Powell reinforced that “two percent is and will remain our inflation target.” While some believe that a higher rate of inflation (and interest rates) could be digested by the U.S. economy over the long-term, the Fed remains actively engaged in a campaign to bring inflation down. In the Fed’s view, allowing for an elevated rate of inflation would likely be counterproductive in the short-term, particularly given its emphasis on the belief that there are long and variable lags to monetary policy and that there is still further transmission to come.
The market reaction to Powell’s speech was admittedly more muted when compared with last year’s event, but there was an incremental shift in rate expectations that is worth noting. According to Bloomberg, expectations for a Fed hike in September rose to 19.5% and to 45.7% in November. The fed funds target rate is expected to remain above 5% through June 2024 and rate cuts of less than 1% are expected through the end of next year – down from closer to 1.5% in early August. U.S. equities sold off modestly during the speech, but rebounded back to slightly positive in the afternoon as the takeaway for investors remains that the Fed continues to be data dependent and is operating on a meeting-by-meeting basis. We believe it is worth noting that both the equity and bond markets may have reacted more strongly to the (modestly) hawkish message if not for the rise in yields and the losses in equities posted month-to-date.
With earnings season drawing to a close, Fed action -- and the economic data on which that action is based -- will be the focus for investors over the next several weeks. Powell’s Jackson Hole speech only reinforced the importance of that data in determining policy for 2024.
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