Powell’s Jackson Hole speech comes with the Fed and the market on different sides
The Federal Reserve continues to tell the market that it is serious about conquering inflation even if it means damage elsewhere. But the market still has a hard time taking it seriously. So it will be up to Fed Chair Jerome Powell next week to push the issue further. The central bank chief will address his colleagues on Friday at 10 a.m. ET at the Fed’s annual symposium in Jackson Hole, Wyoming. This year̵[ads1]7;s focus at the Kansas City Fed-sponsored event will be “Reassessing Constraints on the Economy and Policy.” Market participants will look for clear guidance on how far decision-makers are looking to push the inflation fight, what the criteria will be and what the consequences of the fight might be. “The market is just as data dependent as the Fed is, if not more so. [The market wants] just some clarity on how he sees getting to price stability,” said Quincy Krosby, equity strategist at LPL Financial. During a summer that has seen the most aggressive tightening of Fed policy since the early 1980s by then-Chairman Paul Volcker , the market nevertheless maintained a sunny disposition. The S&P 500 has risen about 17% on the back of both better-than-expected corporate earnings — and a belief that the Fed will take as delicate an approach as possible in the fight against inflation. This reaction has appeared to contradicting the statements of several Fed officials who have said that inflation is the primary challenge right now and requires an all-out approach.Determined to be dove Earlier this week, St. Louis Fed President James Bullard told The Wall Street Journal he wants to see a third consecutive rate hike of 0.75 percentage points at the September meeting.Minneapolis Fed President Neel Kashkari said Thursday that he is committed to fighting inflation and not sure if it won’t come at the expense of a recession. And San Francisco Fed President Mary Daly said she expects the Fed to hold interest rates steady once they reach a restrictive level — contrary to market expectations for a rate cut in 2023. However, markets have continued to rise even as Fed officials warn of higher interest. increases, as was the case with Gov. Michelle Bowman , who said earlier this month that “comparable” rate increases over time are likely needed three-quarters of a point forward. “Risk markets seem determined to read a dovish message into the Fed communication that we believe simply isn’t there.” Citigroup economist Andrew Hollenhorst said in a note this week. “A committee that values its ‘decision’ in fighting inflation is unlikely to become significantly more dovish as long as underlying inflation remains well above target and does not slow down convincingly.” But the week ended on a sour note, and that may be because comments from Bullard and others began to resonate with investors. “This year’s Jackson Hole Symposium comes at a critical time for monetary policy,” Matthew Luzzetti, chief economist at Deutsche Bank, told clients in a note. “Officials are plotting how to shift down from this ‘unusual’ pace of tightening in a way that retains inflation-fighting credibility while maintaining the prospect of a soft landing. The warnings are echoing around Wall Street. Bank of America equity strategist Michael Hartnett warned that the current market rally is likely just a bear rally that could be undone as investors realize the Fed still has a lot of work to do on inflation. The bank’s economists said even the recent spate of better-than-expected news on jobs and retail spending should be viewed with caution as “stronger incoming data reduces the likelihood that the economy will slide into recession in the near future, but likely increases the risk of a hard landing over time as it could mean more Fed tightening.” Market prices have tipped for a half-point rate hike next month, and the Street expects not that Powell will give any clear signals about which way he leans . “How far are you prepared to go before you reach price stability?” LPL’s Krosby said. “That’s ultimately what the market wants to know, and I’m not sure he’s prepared to tell us that.”
