The word from Jackson Hole - Key Takeaways

DEWITT, Mich. - Aug. 29, 2023 - PRLog --

• Last year, Fed Chair Powell dashed hopes for a swift end to the Fed's rate hikes. This year, the message was still hawkish but more balanced.
• The Fed's tone is gradually evolving in a more favorable way for both equities and bonds, but some uncertainty remains around what will be needed to fight the last mile of inflation.
• Growth has stayed more resilient than most expected (including the Fed), though some downside remains as the rate hikes filter through the economy. We think policy rates are now at, or nearing, a peak.
• Bonds are under pressure, but the higher-interest-rate component can now better help cushion price declines.

The end of August is often associated with the conclusion of summer vacations, back-to-school preparations, and the transition to fall. From an investor's viewpoint, late August is when the attention turns to the Federal Reserve's annual Jackson Hole symposium, which offers policymakers an opportunity to outline broad policy shifts. In the past, Fed chair speeches have created a buzz and set the tone for the markets. That was certainly the case one year ago when Jerome Powell, in a short and pointed speech, telegraphed the Fed's determination to defeat inflation even if it results in "some pain" for U.S. households. His message dashed hopes for a swift end to the Fed's rate hikes, leading stocks and bonds lower in the month that followed.

Fast forward to this year. Powell's speech was still hawkish but more balanced, highlighting data-dependency and keeping options open.

Three key takeaways

1. 2% is and will remain the Fed's target – Chair Powell pushed back on speculation that the Fed could tolerate or raise its inflation target, as some academics and market participants have recently suggested. Powell acknowledged the recent softer inflation reports, but he highlighted that this is "only the beginning of what it will take."

2. Officials are determined to keep at it until the job is done – The Fed is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed's target (a hint on rates staying higher for longer if data warrants). To achieve that will likely require a period of below-trend economic growth and some softening in labor-market conditions.

3. The Fed may be close to wrapping up its rate hikes – After having hiked rates aggressively since 2022, Powell signaled that policy has shifted to a phase where policymakers are sensitive to the risk of doing too much. Powell mentioned the Fed will proceed carefully on whether to hike again, but he didn't appear to suggest that the ongoing resilience of economic growth will necessarily prompt further tightening.