Jackson Hole: higher for longer?

Jackson Hole and the market reaction

The Federal Reserve held its annual Jackson Hole Economic Symposium last week. The conference, which gathers central bankers each summer, has implications on the direction of the economy. Last year, Chair Powell delivered the Fed’s plan to continuously fight inflation by sharply raising rates, and they did just that.

Last week, all eyes were on the Fed and the markets braced for impact on Thursday, with stocks selling off and Treasury yields rising. In his speech given Friday morning, Powell said that the Fed is in a “position to proceed carefully,” but hawkishly stated that they are “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until [they] are confident that inflation is moving sustainably down toward [their] objective.” The Fed's primary message was a commitment toward price stability. Powell emphasized the Fed’s 2% inflation target and, while he recognized that progress has been made, inflation remains too high.

Powell reinforced the notion that the Fed could maintain rates higher for longer, which is a concept that the markets had already adjusted for weeks prior. The economy continues to grow faster than desired to bring inflation down, thus leading to ongoing concerns by both the Fed and the market. Initially, Powell's comments prompted stock selloffs and a continued rise in Treasury yields, as the market digested potential increases in the federal funds rate. However, stocks quickly rebounded Friday afternoon. According to the CME FedWatch Tool, the probability for rates to stay constant in September are still relatively high at 80.5%. However, the market is beginning to imply that an additional rate hike could occur as early as November.

The next FOMC meeting is slated for September 19-20, and the market will anxiously await additional data, including Core PCE, to signal whether September will bring on additional hikes.

S&P follows suit and downgrades regional banks

S&P announced that they will downgrade the credit ratings of five regional U.S. banks. Similar to Moody’s, S&P cited higher interest rates, hampered profitability, and funding concerns as reasons for the rating cuts. S&P also lowered its outlook on several other banks. It is evident that ratings agencies are re-evaluating credit risks and, although the banking sector remains stable, this is something to keep an eye on given the rippling effect that future ratings cuts could have on the market. The increased potential stringency of lending could come at a cost for borrowers that rely heavily on bank funding for capital, ultimately reducing credit availability which may lead to an economic slowdown if not offset by other capital sources.

Battle of existing homes vs. new homes

Existing home sales fell 2.2% in July from the month prior, handily beating expectations of a 0.92% decline. This marks the third consecutive drop in existing home sales, reaching the lowest levels since January 2023. The same catalyst for the declines remains true — high mortgage rates and low supply. Sellers are increasingly reluctant to put their house on the market because they will face the same dilemma buyers are currently facing. Conversely, new home sales rose 4.4% in July to a 17-month high, beating expectations by 9,000 units. In many ways, the inverse correlation of existing home sales and new home sales makes sense. With scarce existing home inventory, buyers are more willing to turn to new home purchases, even with mortgage rates at 23-year highs. With the Fed’s most recent comments, one can speculate that higher rates are here to stay for the long term.

Looking forward

Moving into this week, we have core PCE, personal income and personal spending on Thursday, followed by nonfarm payrolls and unemployment rate on Friday.