Jerome Powell at Jackson Hole: Expect Pain

Jerome Powell at Jackson Hole

Jerome Powell gave his speech at the Jackson Hole Symposium on Aug 25, 2023 addressing the inflation of the US economy. 

Powell highlighted that the US economy has come a long way from the peak of inflation in June 2022 at 7% to now 3.3% as of July 2023.
He said, this decline is very good news but they are still far away from the Fed’s target of 2% inflation and they would continue the hike rate in the near times.

“It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak – a welcome development – it remains too high.”

– Jerome Powell

Summary of Jerome Powell’s Speech

Inflation Causes and Management:

  • High inflation happened due to a collision of strong demand and supply issues during the pandemic & the Ukraine conflict.
  • Solution involves a combination of allowing pandemic-related demand and supply distortions to unwind and tightening monetary policy to slow down demand.

Inflation Improvement:

  • U.S. headline inflation (overall price increase) on a 12-month basis reached 7% in June 2022, then decreased to 3.3% in July.
  • Core inflation (excluding food and energy) on a 12-month basis peaked at 5.4% in Feb 2022 and gradually declined to 4.3% in July.

Categories of Inflation:

  • Core goods inflation decreased significantly, particularly for durable goods due to tighter monetary policy and supply-demand adjustments.
  • Housing sector, sensitive to monetary policy, experienced a noticeable impact as mortgage rates doubled, leading to lower housing activity and price growth.
  • Non-housing services, a major part of core inflation, is relatively stable due to less impact from supply chain issues, but further progress is important.

Looking Ahead:

  • Unwinding pandemic distortions should continue lowering inflation, but restrictive monetary policy will play a growing role.
  • Achieving a sustainable 2% inflation might require a period of below-trend economic growth and moderated labor market conditions.

Economic Growth and Policy Impact:

  • Tighter monetary policy has raised real yields and slowed economic activity and investment.
  • Positive GDP growth surprises and robust consumer spending indicate uncertainty in cooling economic growth as expected.

Labor Market Dynamics:

  • Labor market improvement, driven by increased participation and immigration, is ongoing.
  • Demand for labor has decreased with fewer job openings and slower job growth.
  • This labor market rebalancing has eased wage pressures as wage growth slows gradually.

Uncertainties and Risk Management:

  • Difficulty in determining neutral interest rates and timing of monetary tightening’s impact on the economy.
  • Supply-demand dislocations unique to this cycle affect inflation and labor market dynamics, creating uncertainties.
  • Balancing the risk of tightening too much or too little is challenging, requiring careful consideration.

Conclusion and Future Steps:

  • Aim is to achieve and sustain 2% inflation target.
  • Monitoring data, outlook, and risks to decide whether to tighten policy further or maintain current stance.
  • Balancing risk is important for both achieving price stability and supporting labor market conditions.

What does this speech mean for the stock market investors?

As its clear that Fed has no intention to stop the interest rate hikes immediately. The stock market investors and speculators would have to go through some volatility until the Federal Reserve and the Banks get control over the inflation.

All the risk-assets which includes stocks and equities are inversely proportional to the interest rates. As the interest rates go higher, the capital is harder to get and liquidity in the market is dries out causing the stock prices to go down.

So in conclusion the new bull market has to wait until the Fed decides that they have achieved the target inflation rate and stops hiking interest rates.

Would this result in an opportunity for investors to buy into their favorite company’s stock?

We have seen since summer of 2022 there are constant rate hikes and the S&P500 has been in a continuous downtrend.

But the good news is we are possibly arriving towards the end of a streak of rate hikes now. If the Fed is finally done with the rate hikes and decides to pivot in the coming quarters in 2024, then these last few months before the Fed pivots would be the best time to buy well researched stocks.
After the interest hikes are finished, we will again see a flow of liquidity into the speculative and high risk assets pushing the prices up bringing in joy for the long term investors.

When is the next Fed Interest Rate Hike Decision?

The next FOMC meeting is scheduled on September 19-20, 2023.

After this month’s speech from Jerome Powell at Jackson Hole, we can expect another rate hike in September. Would this be the final interest rate hike before the Fed finally decides to Pivot and give the much wanted relief to the stock market.


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