Today, Powell spoke at Jackson Hole in a speech that was largely a “to the script” moment. No threats of pain for businesses and households like last year — but a mild amount of “between the lines” clarity about whether or not the Fed plans to hike in September.
Jackson Hole Key Points
- Powell reiterated the Fed’s commitment to achieving a 2% inflation target, despite recent backlash regarding the arbitrary nature of using 2% as an inflation goal.
- Powell: Despite tightening policies over the past year, inflation remains high, prompting the Fed to consider additional rate increases to address the situation effectively.
- Powell noted that there may still be significant further drag from past rate hikes — a welcomed comment for those who are concerned that the Fed is moving too fast, and too far.
- Powell highlighted the decline in U.S. total PCE inflation from its peak of 7 percent in June 2022 to 3.3 percent in July, and emphasized the positive impact that declining inflation has on households and businesses.
- This was roughly the opposite of Powell’s warning last year that “pain for businesses and households” was soon to come.
- Powell: Core PCE inflation, excluding food and energy components, decreased from 5.4 percent in February 2022 to 4.3 percent in July, a progress attributed to the resolution of supply-demand imbalances, especially in sectors like motor vehicles.
- Powell emphasized the importance of restrictive monetary policy in sustaining inflation reduction, and noted the need for a period of below-trend economic growth and labor market softening to achieve the 2 percent target.
- This was a “stick to the script” moment that is usually included in Powell’s public comments.
- Powell: The tightening of monetary policy has led to more stringent financial conditions, impacting economic growth and lending standards, though evidence suggests the economy might not be cooling as anticipated.
- Powell’s response to the strength of the economy may have been the most controversial and criticized comment from Jackson hole.
- In prior speeches, Powell spoke positively about the U.S. economy “withstanding the impact of Fed rate hikes” while still continuing to see a decline in inflation. In this speech, Powell implied that if the economy continues to see strength, it could be yet another reason to potentially raise rates.
- Powell: The labor market rebalancing continues with improved labor supply and moderated demand. Job openings have declined, and wage pressures are easing, leading to gradual wage growth adjustments.
- Powell acknowledged uncertainties surrounding the neutral rate of interest and the timing of monetary tightening effects on economic activity and inflation.
- Powell underscored the complexity arising from unique supply-demand dislocations in this cycle, likely a comment made in relation to China, affecting inflation and labor dynamics, requiring agile policymaking to manage risks.
- Powell concluded by reiterating the challenge of navigating economic uncertainties and the Fed’s commitment to risk management. “Future meetings will assess progress based on data and the evolving outlook, influencing decisions on policy adjustments.”
- Powell’s comments were largely positive. He didn’t give any indication about when rate cuts would come, and he didn’t explicitly say anything about September, but his choice not to note the most recent uptick in inflation (the first in many months) gave many investors reason to believe he sees the data largely as positive. As such, odds of a pause in September are currently at 80%.
Stock Market Response to Jackson Hole
The stock market traded in choppy fashion following Powell’s speech, which did little to clarify or add to what we know about where the Fed is heading next. Most watchers heard the speech as, “We’re probably going to pause in September.” However, the tone of Powell’s comments regarding U.S. economic strength gave some investors reason for pause.
The market originally dipped lower following the speech, but returned to intraday highs before the end of the day. The SPY finished the day +0.7%, the QQQ ended at +0.78%, the IWM ended at +0.43%, and the DIA finished at +0.72%.
While a positive trading day is nice, and stocks have bounced lightly this week, they have not broken out of the late-Summer downtrend yet. That said, Tom Lee of FundStrat called Wednesday and Thursday a good time to buy the dip in the market, noting that his lead technician Mark Newton believes we are likely at or near the bottom of this pull back.