Hawk and bear

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A hawkish tone from Powell caused market to see bear again.

The economic symposium down in Jackson Hole was about as hawkish as investors could have expected, sending markets into a tailspin on Friday. All three major averages slumped between 3%-4%, sending risk-off signals to other sectors and asset classes (Bitcoin fell below $20K for the first time since early July). Sentiment may remain dented in the week ahead, or stay at somewhat of a standstill until the release of fresh market data (home prices on Tuesday and the jobs report on Friday).

No doves here: Going into Jackson Hole, there were some hopes that the Fed would telegraph a “pivot” on its aggressive policy tightening, but Chair Jerome Powell shot down any such intentions. “Restoring price stability will take some time and is likely to require a sustained period of below-trend growth and softer labor market conditions,” he told the conference, adding that the road ahead would “bring some pain to households and businesses.” It’s a clear message that the central bank is willing to forego any economic gains made during the pandemic, and possibly a soft landing, in order to ensure that inflation doesn’t get out of control.

“July’s increase in the target range was the second 75-basis-point increase in as many meetings and I said then that another unusually large increase could be appropriate at our next meeting,” Powell continued. “We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Is Powell the new Paul Volcker? In his speech, the Chair referenced the famous inflation slayer of the 1980s, saying part of the equation in anchoring price stability was to also break the grip on inflationary expectations. As pressures become more entrenched, more people expect them to remain high, and factor them into their wage and price decisions. “A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation in the early 1980s… after multiple failed attempts over the previous 15 years… and our aim is to avoid that outcome by acting with resolve now.”