Powell Keeps the Market on Edge
Federal Reserve Chairman Jerome Powell spoke at the Fed’s annual Jackson Hole conference on Friday. His speech was relatively short, and did not include much new information, but it was enough to send markets downward, stalling the rally that we had been enjoying since Mid-July. Here is what Powell said that is keeping the market on edge.
First, Powell reiterated that the Fed’s focus right now is bringing inflation down to the 2% goal and said, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.” This means that the Federal Reserve is trying to slow the growth of the economy to slow the rate of inflation. Of course, the goal is to simply slow the economy, not bring the economy into a recession, but this is easier said than done. The risk of a policy error is high, and most recessions occur when the Federal Reserve is tightening to ‘slow’ the economy.
Next, Powell said that the labor market is too hot. Specifically, he said, “The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.” This statement clearly shows that the Fed considers the labor market as overheated and implies that they can raise rates aggressively to slow the economy and get the labor market more in line.
Finally, Powell said that “July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.” This implies that Powell sees another large increase, perhaps another 75-basis point interest rate increase as appropriate at the next Federal Reserve meeting on September 21st. Some market participants had been hopeful for a 50-basis point increase or even a pause on rate increases. Powell’s statements pour cold water on those hopes.
As we have said for most of this year, inflation remains a key problem for the market. As long as inflation remains high, the Federal Reserve will take steps to slow the economy to keep prices in check. Powell’s comments are not new, but his statements have reminded investors that inflation is still, and problem and the Federal Reserve is still not done raising rates, which keeps investors on edge.