The Fed hosted their 45th annual Jackson Hole symposium this week and featured a speech from Fed Chair Powell on Friday. While many were seeking guidance of 50 bps vs. 75 bps in September, the Fed
emphasized that this is not the most important question.
The ultimate path to resolving economic imbalance is what’s important, and this path will continue to be restrictive and will likely surpass what’s been perceived as neutral policy levels.
Chair Powell said, “While higher interest rates, slower growth and a softer labor market will bring down inflation, they will also bring some pain to households and businesses… but a failure to restore price stability would mean far greater pain.”
Powell indicated that another unusually large rate increase may be appropriate in September as inflation remains widespread throughout the economy.
Fed officials this week projected a general range from 3.25-4.00% (today’s rate is 2.00-2.25%).
Powell said that a single month’s improvement in inflation (July Core PCE +4.6% vs. +4.8% in June), while welcome, falls far short of what the committee seeks to feel confident. History cautions strongly against prematurely loosening policy.
The pandemic, easy fiscal and monetary policy, plus a spike in demand all contributed to the current high inflation and tight labor market.
Powell mentioned that supply imbalances, labor imbalances and strong underlying momentum continues throughout the economy. Fed President Esther George mentioned that consumption has “cooled,” but it really hasn’t come down (July retail sales +10.3% y/y), and that needs to happen to impact inflation.
There is also yet to be a meaningful pivot in the labor market; 3.5% unemployment rate remains at 50-year record lows. Job openings are coming down, and that trend is expected to continue.
Job openings relative to unemployment rate are two points that tend to move together – falling job openings, rising unemployment rate. Labor supply remains a significant pain point for businesses as it remains difficult to hire and challenging to pay higher wages.
The Fed has now underscored that their restrictive policy will bring “pain to households and businesses” – not something we’ve ever heard from Fed officials.
They are comfortable going above neutral rate to ensure that inflation comes down. A 75 bps rate hike in September is very much still on the table. We view this outlook as negative for growth/tech and speculative securities.
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