Following a speech delivered by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Policy Symposium, investors are digesting the underlying forward implications.
Fundamentally, Jerome Powell and Fed policymakers have an extraordinarily difficult task to manage. While they cannot afford to let stubbornly high inflation spiral out of control, they also must avoid overreacting to data. Otherwise, the nation risks falling into a prolonged recession, the very outcome the government sought to avoid at the outset of the Covid-19 crisis.
Still, a broader positive takeaway is that the market responded much better compared to when the Fed Chair delivered remarks at the Jackson Hole event last year. Below are three more takeaways from the economic summit.
Jerome Powell Acknowledges the Obvious
While hawkish monetary policy helped decelerate previously soaring consumer prices, Jerome Powell stated the obvious: the Fed still has much work on its hands. “Although inflation has moved down from its peak — a welcome development — it remains too high,” he said in prepared remarks for his keynote address.
Further, a rise in the benchmark interest rate may not be out of the question, sparking choppiness in U.S. equities and volatility in cryptocurrencies. Also, Asia-Pacific markets stumbled ahead of Powell’s keynote speech.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” the Fed Chair stated. And that objective remains getting inflation down to the main target of 2%.
Jackson Hole News Centers on Strategy Over Tactics
A second significant takeaway from the economic summit was the Fed’s clearly declared focus on strategic directives over immediate tactics. Throughout the past several weeks, the business media machinery ran stories about the ongoing disinflationary trend. However, the theme of the Jackson Hole news may be that the central bank won’t be swayed by immediacy bias.
“The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell stated.
However, he also acknowledged the double-edged sword of monetary policy. “Doing too little could allow above-target inflation to become entrenched,” Powell warned. On the other hand, “[d]oing too much could also do unnecessary harm to the economy.”
Don’t Even Think About Rate Cuts Yet
With progress evident in the effort to spark disinflation, some market observers began asking if interest rates would start coming down. Based on the words of Jerome Powell, those hoping for a reprieve in rising borrowing costs may have to wait a while. He had this to say about the topic:
“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”
To be fair, the Fed Chair did not explicitly remove interest rate cuts from the table. However, as CNBC pointed out, Powell gave zero sign that he’s even considering such an action.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
