Powell at Jackson Hole 2023: the inflation fight isn't over
Chair Powell’s speech today at Jackson Hole confirmed market expectations that the Fed is willing to hold rates higher-for-longer. Powell did not rule out further rate hikes and reinforced the Fed’s commitment to reducing inflation to the Fed’s two-percent target. That somewhat hawkish tone was softened by a focus on evolving price and labor market data, with an acknowledgment that the current policy stance is restrictive.
- Powell reinforced the notion that the Fed could maintain rates “higher for longer." The market had already adjusted to this narrative in recent weeks.
- Powell was resolute in messaging the Fed’s commitment to reduce inflation to its two-percent target.
- The speech acknowledged the risks to a higher policy rate while illustrating strong consumer spending data and labor market data.
- Short-term rates ticked slightly higher following the speech, though no hike is priced in for the Fed’s September meeting. Traders see the possibility of another hike in 2023.
The Fed’s primary message to the markets today was a commitment towards pursuing price stability. While acknowledging the extent to which inflation has come down from its peak, Chair Powell left the door open to further rate hikes, if necessary, until the Fed sees evidence of inflation progressing towards its two-percent target. The speech was viewed as somewhat hawkish, as Powell referenced the possibility of further hikes, reinforced the “higher-for-longer" narrative, and did not discuss policy loosening. That said, the hawkish perspective was largely already priced into the market, with rates traders having previously extended their bets of when the Fed will begin cutting rates to June 2024.
Powell spent a large portion of the speech reviewing the latest economic data. Highlights included optimistic signs of month-over-month inflation having fallen, while conceding that year-over-year core inflation remains elevated. In his assessment of the labor market, Powell noted improvements in labor supply — citing higher labor force participation and immigration post-pandemic — while also pointing out that a decline in job openings has not yet impacted unemployment. As ever, the Fed remains watchful for lags in the data which could impact prices and labor markets in either direction.
Some market participants looked for the Fed to clarify its view of the “neutral policy rate” (also known as R*) that would signify an economy in equilibrium between prices and employment. Instead, Powell went out of his way to note that the Fed “cannot identify with certainty the neutral rate of interest” which results in the challenge of knowing the “precise level of restraint”. Powell commented that the current policy rate is restrictive, adding some balance to the otherwise hawkish tone.
Looking forward, market participants will focus on the pace of change in inflation data assessing if the improvements in month-over-month data translate to its year-over-year analogue. Notably, Powell emphasized the Fed’s focus on Core PCE, which sometimes deviates from Core CPI. As the Fed makes its own assessment of progress towards lower inflation, Powell acknowledged they are “navigating by the stars under cloudy skies”, allowing for flexibility in their ongoing approach in the inflation battle.
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