Fed Chair Powell delivered another hawkish speech in Jackson Hole, implying a “higher for longer” mantra even as efforts to rein in inflation come with economic pain.
August was another painful month in a historically bad year for fixed income investors, and recent labor market and inflation data suggest the Fed won’t let up anytime soon.
Residential rent prices have surged during the past year, and the lag effect could apply upward pressure on the housing inflation metric of CPI for months to come.
Higher for longer.
That is the message from Fed leaders of late regarding the fed funds rate, combating market speculation of a Fed pivot at some point in 2023. The bond market has been swifter to accept this guidance from policymakers, with front-end Treasury yields repricing approximately 50 basis points higher in August leading up to Jerome Powell’s August 26 Jackson Hole speech.
There had been a large pocket of equity bulls still holding out hope that Fed leaders’ inner-dove would emerge, but renewed hawkishness from Powell in Jackson Hole combined with more hot data on inflation and the labor market has effectively poured cold water on hopes the Fed is contemplating a pause or 2023 rate cuts.
Prior to Jackson Hole, Powell had acknowledged a slowdown in the Fed’s tightening effort might be appropriate “at some point.” Although he offered no timeframe for the vague observation, it further emboldened the “Fed pivot” camp. With this in mind, Powell delivered a much more concise 10-minute speech, the shortest by a Fed chair at the Jackson Hole conference since 2010, with the likely goal of leaving no room for obscure comments to be misconstrued as dovish.
Fed leaders have also made it clearer in recent weeks that price stability is the priority at this point and that a soft landing for the economy is a secondary and unlikely objective. To achieve the goal of price stability, Powell suggested it will require a “sustained period of below-trend growth” via “softening of labor market conditions” that will “bring some pain to households and businesses.”
In other words, the decision-making framework has become much simpler for Fed policymakers with a dual mandate of price stability and full employment. With inflation rates significantly above target and unemployment near 50-year lows, the Fed must continue tightening financial conditions until these factors become more balanced, and the labor market, and economy as a whole, cools off.
This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends