Powell Prioritizes Fighting Inflation Over Economic Deterioration In Jackson Hole


The markets were expecting a Jerome Powell with a more hawkish tone at his opening this Friday of the Jackson Hole symposium and they were right. The president of the US Federal Reserve has made a speech in which he has been clear: in the dichotomy between fighting inflation and avoiding economic deterioration , the Fed has to insist on curbing the rise in prices. Along these lines, he has advanced that they will continue to raise interest rates and leave them high for a while to put an end to inflation, rejecting any idea that the Fed is going to back down soon.

“Reestablishing price stability will take some time and requires using our tools vigorously to better balance demand and supply. Reducing inflation is likely to require a sustained period of below-trend growth ,” Powell has said in a speech before the auditorium of the ‘camp’ of central bankers , sent to the press at the same time.

Powell has said that restoring inflation to the 2% target is the central bank’s “main goal right now,” though consumers and businesses will suffer the economic consequences. Powell has acknowledged that higher rates “will bring some pain to households and businesses .”

Looking to the next meeting, on September 21, with the markets pondering between a rise of 50 basis points or a third in a row of 75 (they are in the 2.25%-2.5% range), the central banker has reiterated, as it did in July, that another “unusually large” increase might be appropriate, though it has avoided committing to it. “Our decision at the September meeting will depend on the totality of the incoming data and the evolution of the outlook,” he stressed.

As soon as his words were known, the market has begun to bet heavily on a rise of 75 basis points in September. The CME Group’s FedWatch tool already lists a 58.5% chance of a rise of 75 basis points compared to 41.5% of a rise of 50. Just before Powell’s speech, the percentages were reversed.

“The restoration of price stability will probably require the maintenance of a restrictive policy for some time,” the central banker also said in his speech. As soon as Powell’s words became known, Wall Street shares have begun to fall (losing more than 2%) and the 10-year US bond yield has risen from 3.02% to 3.07% , then moving to 3.03% (the rise to 3% has been consolidated in previous days).

This harsh tone has led the dollar to erase the losses it recorded today with the euro, leading the community currency to once again lose parity with the ‘greenback’ . Of course, risky assets like cryptocurrencies have suffered. Bitcoin has returned to $20,000 with falls close to 4%.

” Historical background advises against premature easing of monetary policy,” Powell said, wanting to strike a harsh tone. The recent drop in citizens’ inflation expectations in the face of the drop in gasoline and the slowdown in inflation in the CPI reading for July caused a relief rally in the market in recent weeks as it was sensed that the Fed would soon loosen its tightening path, with the markets betting on a rate cut as early as 2023.

As this reading prevails and the alleged tightening of financial conditions falls, several members of the Fed have launched themselves into the media in recent days ( Esther George , Raphael Bostic , Neel Kashkari or James Bullard ) to defend that the hawkish path will continue in the face of the still tenuous signs that inflation is easing. That made anticipate a somewhat harsher speech from Powell and for the 10-year US bond it has once again exceeded 3% in recent days .

In June, Fed officials projected a rate hike to 3.4% by the end of this year, based on their median estimate, and to 3.8% by the end of 2023. They will update these forecasts in September. Investors have seen cuts as likely in the second half of 2023, although Fed officials are beginning to challenge this view.

two good facts
Powell wanted to claim himself as a ‘hawk’ precisely on the day he received two good data on inflation . A while before his intervention, it was published that the core PCE, a kind of GDP deflator that excludes the most volatile components such as energy and fresh food and that is the Fed’s fetish indicator.

The data calmed down in July and a little more than expected by analysts. The core PCE registered a year-on-year increase of 4.6% in July compared to the previous 4.8% and the 4.7% expected by the market. Likewise, on a month-on-month basis, the advance was 0.1% compared to 0.6% in June and the 0.3% expected by economists . These readings confirm the trend seen in the US CPI for July . “Prices loosen more than expected,” Bankinter analysts note.

The other positive data has come from the inflation expectations of citizens collected by the University of Michigan , which continue to relax. Consumers see prices rising 4.8% over the next year, up from 5.2% in July. They also expect prices to rise at an annual rate of 2.9% over the next five to ten years, unchanged from last month.

However, the most watched central banker in the world has called for complacency with the July data. “Although July’s lower inflation readings are welcome, a single month’s improvement is a long way from what the committee will need to see before we are confident that inflation is coming down,” he said.

Cox (eToro): “Markets Were Fighting the Fed and Powell Just Fighted Back”

“Markets were fighting the Fed, and Powell just struck back. Powell’s words today were a reality check for this latest rally. He himself said at the beginning of today’s comments that the message is clear and direct: the “The Fed will not rest until inflation is under control. We have already heard this comment in some form, but it is significant that Powell’s tone has returned to aggressiveness despite signs that inflation is slowing,” he said in a statement. Post-Speech Comment Callie Cox, Analyst at eToro.

“Powell’s language also indicates that the Fed could leave high rates for some time, a tough pill for growth-minded investors to swallow . Higher rates and an ongoing battle over inflation could be an exceptionally difficult environment to navigate. ” weather for companies, especially smaller or speculative tech companies,” adds Cox.