What Jay Powell's Jackson Hole message means for markets
Jay Powell delivered a hawkish speech on inflation at last week's Jackson Hole meeting. Alex Rankine explains what his speech means for markets.
“Gone are the days [when] we could rely on a Powell-backed equity rally,” says Ipek Ozkardeskaya of Swissquote Bank. Stockmarkets are used to central bankers offering them goodies when the economy weakens, but last week US Federal Reserve chair Jerome Powell instead threatened to remove the punchbowl. He made clear that “inflation must come down even if it means pain for households and businesses”.
The annual “central bankers’ conclave” in Jackson Hole, Wyoming, sees the world’s most powerful monetary policymakers gather to share “the latest reading from their models, crystal balls or chicken intestines”, says Irwin Stelzer in The Sunday Times. In 2021 Powell declared at the meeting that high inflation “was likely to prove temporary”. What a difference a year makes. With US inflation at 8.5%, he will now do battle with the inflationary tiger. Markets tumbled after Powell’s speech, with the S&P 500 and Nasdaq Composite falling 3.4% and 3.9%.
Japan’s Nikkei slipped by 2.7%. US interest rates are currently between 2.25% and 2.5%. Markets now expect the Fed to raise rates to “3.8% by February 2023, up from expectations of 3.3%” at the beginning of August, says the Financial Times. Powell and other senior global central bankers pushed back strongly against market bets that they will start cutting rates next year, says Bloomberg. Instead, they “expect to raise rates and hold them at elevated levels” until inflation is back under control.
Learning from history
Powell was also at pains to dash hopes that July’s softer inflation figures would herald a Fed pivot, says Ian Shepherdson of Pantheon Macroeconomics. “A single month’s improvement falls far short of what [we] need to see before we are confident that inflation is moving down,” he said. Powell noted that “the historical record cautions strongly against prematurely loosening policy”. Powell is referring to the 1970s, say Thomas Sargent and William Silber in The Wall Street Journal. When inflation spiked to 11% in 1974 thenchair Arthur Burns reacted by hiking rates to more than 12%.
That move temporarily brought inflation under control, but the resulting recession and unemployment then prompted Burns to ease too quickly. He cut short-term rates in half, causing a second price spike that eventually saw inflation peak at 14.6% in 1980. The Fed remained on the back foot in the fight against the “great inflation” until the early 1980s.
Powell will be keen not to repeat that experience, says Russ Mould of AJ Bell. Low unemployment and few “signs of distress in the wider US economy and financial system” from hikes so far will probably embolden the Fed to “keep monetary policy tighter for longer than financial markets currently expect”.