Powell’s Speech Confirms: Bears Still in Control

Federal Reserve Chairman Jerome Powell

Stocks climbed slightly today in response to Fed Chairman Jerome Powell’s speech in Jackson Hole. The address indicated potential actions by Powell and other Fed officials, but failed to provide anything concrete.

The Dow Jones Industrial Average went up by 141 points or 0.4%, even reaching over 200 points at its highest during the session. The S&P 500 increased by approximately 0.2%, and the tech-heavy Nasdaq Composite saw a 0.1% growth.

In his speech at the Jackson Hole Economic Symposium, Powell mentioned that the central bank is “prepared to raise rates further” to ensure inflation reverts to its target of 2%. Reminding the market of his previous year’s message, Powell emphasized, “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so.”

Many investors, earlier in 2023, anticipated a U.S. recession and expected the Fed to initiate a reduction in interest rates. Contrarily, in his recent address, Powell outlined two prospective paths for interest rates – either maintaining the status quo or raising them. Powell noted, “Although inflation has moved down from its peak — a welcome development — it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” Given the significant rate hikes in the past 18 months, Powell conveyed the Fed’s position to approach future actions cautiously.

Although Powell acknowledged the reduction in inflation as a positive shift for the Fed, he emphasized the need for continued progress. Referring to the core PCE inflation statistics, Powell indicated uncertainty in the continuity of these reduced figures and mentioned that there’s still a considerable way to go to achieve price stability.

On the topic of inflation reduction, Powell stated that monetary policy would likely have an escalating role, especially as pandemic-induced economic anomalies phase out. Dismissing speculations, Powell reaffirmed the Fed’s dedication to the 2% inflation objective, stating, “Two percent is and will remain our inflation target.”

Despite the robust U.S. economy in 2023 posing certain challenges to the Fed, Powell acknowledged that it wasn’t cooling as anticipated. Elaborating on the labor market’s dynamics, Powell mentioned its ongoing rebalancing process, with factors like wage pressures becoming moderate.

Stocks displayed volatility post-Powell’s statements, with benchmarks fluctuating. Quincy Krosby, chief global strategist for LPL Financial, commented, “The market could be upset that he didn’t come out and say we’ll be on pause … the market has been desperate for months and months and wants to declare that the Fed is finished.”

Given the ambiguity in Powell’s direction for interest rates, Krosby highlighted the increasing U.S. Treasury yields as a determinant of market trajectory, with the yield on the benchmark 10-year Treasury note increasing by nearly 2 basis points to 4.253% post-speech.

David Wagner, from Aptus Capital Advisors, noted the speech dampened any hopes for rate cuts by the Federal Reserve in the near future. He stated that investors might have to brace for prolonged higher rates, which could reintroduce the risk of interest rates affecting market valuations. Wagner emphasized, “Powell basically disabused investors that cuts are right around the corner, with ample retread on how far they still are from their price objective.”

Overall, it was a hawkish speech, but not necessarily that surprising. Markets swung wildly intraday but remained mostly unchanged. Considering that the market is currently in a bearish short-term trend, this doesn’t bode well for bulls, who were hoping that Powell would spur a sudden bullish reversal with his comments.


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