The Oracle of Jackson Hole Speaks! (But What Did He Really Say?)
You probably watched the TV news helicopter coverage Thursday night of Donald Trump’s motorcade, as the former president traveled to an Atlanta jail to get booked on charges of election interference. The eye-in-the-sky sensationalism, ubiquitous on all channels, made me think of O.J. Simpson fleeing the cops in his white Bronco.
The moment also reminded me that Federal Reserve Chief Jerome Powell, although he wields great power over our financial lives, gets little coverage in the mainstream press (other than niche channels such as CNBC). The vast majority of Americans would flunk this snap quiz: “Who is Jerome Powell and what does the Fed do?”
People prefer a simple narrative that can be portrayed in cinematic style. The U.S. central bank does not fit that description. And yet, when Mr. Powell uttered a few words on Friday in Jackson Hole, Wyoming, he instantly moved trillions of dollars.
At this week’s Jackson Hole Economic Symposium of central bankers, Powell finally gave his highly anticipated remarks on the Fed’s monetary policy and economic outlook. Let’s examine his pronouncements, what they mean for the economy and investors, and how markets reacted.
The FUD factor…
Powell hinted that future interest rate hikes might be in the cards because inflation is still too hot. In response, the main U.S. stock market indices Friday initially plunged deeply into the red. However, as the trading session wore on, Wall Street shook off its rate fears and the indices closed higher as follows:
- DJIA: +0.73%
- S&P 500: +0.67%
- NASDAQ: +0.94%
- Russell 2000: +0.40%
The S&P 500 and NASDAQ snapped their three-week losing streak, as investors decided to accentuate the positive aspects of Powell’s remarks (e.g., better-than-expected economic growth). Regardless, it was a volatile trading day and you should expect continued FUD (fear, uncertainty and doubt) leading up to the next meeting of the Federal Open Market Committee (FOMC), scheduled for September 19-20.
When Powell spoke at the Jackson Hole event in 2022, the Dow Jones Industrial Average plummeted by 1,000 points and the S&P fell by 3%, after he warned that “pain” was ahead for U.S. households.
Compared to his speech last year, Powell’s Friday speech was less hawkish and the market’s response was certainly more positive. But the message was downbeat enough to stoke worry.
Wall Street had hoped that the Fed would pause its tightening campaign when the central bank’s policy-making FOMC meets in late September, but Powell wasn’t willing to preclude the possibility of another increase next month.
Powell asserted that the economy “may not be cooling as expected,” including economic growth that has exceeded expectations, resilient jobs expansion, and consumer spending that has stayed “especially robust.”
Powell also noted that the beleaguered housing market was picking up steam, after an 18-month slump, which could further fuel rent inflation. High rents have been a major inflationary pressure; he suggested that relief for shelter costs is not in sight.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.
That’s not what Wall Street wanted to hear. But then again, he left the door open (ever so slightly) to a pause. Meanwhile, corporate earnings and economic growth have been surprising on the upside. The Q2 earnings blow-out scored this week by chipmaker Nvidia (NSDQ: NVDA) has cast a “halo effect” onto the broader stock market.
“We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” he said.
Powell’s remarks followed 11 interest rate hikes that have driven the Fed’s key interest rate, the federal funds rate, to a target range of 5.25% to 5.50%, the highest level in more than 22 years (see chart).
That said, Wall Street still expects inflation to continue cooling and for the Fed to start easing up in early 2024. Over the long term, the fed funds rate is projected to trend around 4.75% in 2024 and 3.50% in 2025.
By market close Friday, the benchmark 10-Year Treasury yield (TNX) had edged higher to knock on the door of 4.3%. A close of the TNX above that critical support area would be bearish for stocks. When the 10-year yield rises, it means more expensive mortgages, credit card rates, car loans, and student debt. As such, the yield is a proxy for investor sentiment over the economy. When the yield goes up, stocks tend to go down.
Donald Trump got his mug shot taken Thursday; the scowling image is now world famous. Conversely, most Americans couldn’t identify Jerome Powell in a line-up. But today, by saying a few words in rustic Wyoming, Powell just made life more difficult for businesses, consumers and investors.
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John Persinos is the editorial director of Investing Daily.