Jackson Hole, Wyoming, looks like a beautiful place to visit.
Perhaps marginally less so when a large group of economists is holding their annual symposium there, but I’m guessing it doesn’t detract too much. This week, the town’s attention was on the annual Jackson Hole Economic Symposium, where central bankers from around the world gathered to discuss financial trends. The main attraction, at least domestically speaking, was Jerome Powell’s speech and what it would signal for upcoming interest rate policy. So, without further ado, let’s take a look.
Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday signaled a significant shift in the Federal Reserve’s monetary policy stance. The Fed Chair’s remarks strongly indicated that the central bank is preparing to cut interest rates, likely starting at their September meeting.
Economic Outlook and Inflation Progress
Powell expressed a largely positive view of the economy, stating it is “growing at a solid pace.” He highlighted the substantial progress in combating inflation, emphasizing, “My confidence has grown that inflation is on a sustainable path back to 2%.” This assessment marks a crucial milestone in the Fed’s efforts to achieve price stability without triggering a recession.
Powell noted that inflation had decreased significantly from its peak, saying, “Based on the Fed’s preferred measure, inflation had decreased to 2.5%, down from a peak of 7.1% two years ago.” He also pointed out that the more widely recognized consumer price index has shown a reduction from a high of 9% in June 2022 to under 3% last month.
Interest Rate Cuts on the Horizon
The Fed Chair made it clear that the time has come for policy adjustments, strongly hinting at upcoming interest rate reductions. Powell stated unequivocally, “The time has come for policy adjustments.” He elaborated: “The path forward is evident, and the timing and scale of any rate reductions will be contingent upon incoming data, the changing outlook, and the associated risks.”
While he refrained from specifying these cuts’ exact timing or magnitude, Powell emphasized that decisions would be data-dependent and responsive to evolving economic conditions.
Labor Market Considerations
Powell expressed some wariness about the job market, indicating that the Fed will strive to maintain a robust labor market while pursuing its inflation target. He stated, “We will exert every effort to bolster a robust labor market while advancing toward price stability.”
The Fed Chair clarified that the current unemployment trend is not due to layoffs but reflects an increase in available workers and a “slowdown from the previously frantic hiring pace.” He expressed skepticism that labor levels would soon contribute to elevated inflationary pressures.
Historical Context and Lessons Learned
Powell reflected on the lessons learned from past inflationary periods, including the high volatility of the 1970s and 1980s and the low, stable inflation of the past quarter-century. He acknowledged that the Fed initially underestimated the inflationary threat when it emerged in early 2021, stating:
“At that time, we anticipated the surge in prices would be temporary, merely a short-term effect of pandemic-induced supply chain disruptions. We believed the pressures would dissipate fairly quickly without necessitating a monetary policy reaction — in other words, that the inflation would be transitory.”
Hindsight is 20/20; however, once it was clear the inflation was more than transitory, the Fed used the lessons of the past to take aggressive action to reign it in as quickly as possible.
Looking Ahead
Powell outlined a cautious approach to future policy decisions, emphasizing the need for flexibility and humility in the face of economic uncertainties. He concluded his speech by saying:
“While the task is not complete, we have made significant strides. The pandemic economy has proven to be unlike any other, and there is still much to learn from this extraordinary period.”
Powell’s speech at Jackson Hole has set the stage for what could be a significant shift in monetary policy, with rate cuts clearly on the horizon. As the economic landscape continues to evolve, all eyes will be on the Fed’s upcoming meetings for further clarity on the timing and extent of these anticipated policy changes.
Economy
- Markets popped on Friday after the speech by Fed Chair Jerome Powell. By the end of the week, the S&P 500 was up 1.4%, the Nasdaq was up 1.4%, and the small-cap Russell 2000 was up 3.6%.
- The biggest news of the week was the downward adjustment in Nonfarm payroll numbers from the last 12 months, down 818,000 from the previous reports.
Stocks
- U.S. equities were in positive territory. Real Estate and Consumer Discretionary were the top performers, while Energy and Technology lagged. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased nine basis points to 3.81% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
