Powell Leaves Hikes on The Table: Aug. 25, 2023

Federal Chairman Jerome Powell struck a hawkish tone in Jackson Hole this morning, providing the equity market with another green to red reversal on the heels of yesterday’s painful selloff. Yesterday’s decline was partially triggered by a tight labor market striking fears among investors that the Fed would maintain higher interest rates for longer than expected. This morning’s reversal on the other hand, was due to Powell’s affirmations that we are not near the end of Fed tightening.

Those concerns were well warranted. This morning, Powell emphasized that the Fed is willing to raise rates again if needed and he emphasized that the labor market and economic growth have not weakened sufficiently to reach the Fed’s 2% inflation target. While inflation has declined sharply since last year’s nosebleed levels, it remains well above the objective. June and July results have been encouraging but two months of lower inflation are not enough for the Fed to be confident that price gains have normalized. While noting labor market progress amidst gains in labor force participation and declines in the demand for worker hours, he implied wage gains, job openings, unemployment, and job growth remain far too robust to accommodate 2% inflation.

Within core inflation, Powell noted that industrial production has weakened with goods experiencing deflation while housing services have also started to moderate as leases turn over with lower rents. Non-housing services inflation, however, is still too strong. He maintained that Covid-19 pandemic inflation pressures continue to moderate, but as time progresses, monetary policy will become the primary factor for slowing inflation. 

Markets Struggle for Direction

Markets were adding to yesterday’s losses on the heels of a hawkish presentation by Fed Chair Powell before bouncing back. While markets struggled for direction, equities pulled a green to red reversal intraday, with the S&P 500 Index down 0.4% after being up 0.8% earlier. In a broad move lower across indices similar to yesterday, only the defensive utilities, health care and consumer staples sectors are up on the session. Bond yields and the greenback are climbing, with Powell’s tone reminding investors that the end may not be near. In fact, probabilities of another 25 basis point (bp) hike rose to 20% for the September meeting and 49% for November. The 2- and 10-year Treasury maturities are up 6 and 4 bps to 5.08% and 4.28% while the Dollar Index is up 39 bps to 104.39. Crude oil is up 0.5% to $79.46 per barrel as traders examine the possibilities of a reintroduction of Venezuelan supply against continued production restraint from OPEC +.

Powell Sticks by His Guns

Powell’s statements underscore that the Fed’s battle against inflation has been longer and more aggressive than many investors anticipated. In a sense, Powell’s comments this morning were a continuation of his past warnings of extended monetary policy tightening. The combination of Covid-19 pandemic fiscal stimulus, Covid-19 pandemic-induced supply chain issues and the surge in consumer spending on goods and subsequent shift to spending on services has created unchartered territory for inflation and monetary policy. Investors who were hoping that goods deflation and moderating price increases for housing services would prompt the Fed to turn dovish had their expectations once again crushed as Powell pointed to a firm labor market and non-housing services as a justification for his hawkish stance. Visit Traders’ Academy to Learn More about Economic Indicators