The Jackson Hole meeting is where the world’s leading economic minds gather to discuss policy, the economy, and their overall frameworks for approaching their jobs. π§
If you saw today’s stock market selloff, the title of this post may seem strange, but bear with us.
First, let’s start with what Federal Reserve Chairman Jerome Powell said. You can read the full speech here, but these quotes stood out to us.
βWhile higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.βΒ
βHistory shows that the employment costs of bringing down inflation are likely to increase with delay. Our aim is to avoid that outcome by acting with resolve now.β
“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
βCentral banks can and should take responsibility for delivering low and stable inflation. Our responsibility to deliver price stability is unconditional.β
β…historical record cautions strongly against prematurely loosening policy.”
Powell said nothing new; he just used stronger and more direct language than in the past. π¬
The Federal Reserve has been saying that it will be data-dependent and continue tightening until long-run inflation moves meaningfully back towards its 2% target. It already met its employment mandate; the labor market is “hella tight, yo,” so bringing down inflation is its only focus.
Yet despite comments from Powell and most of the Federal Reserve telling us this over the last few months, the stock market has been rallying since mid-June in hopes that it might “pivot” to a looser policy in 2023.
Powell likely had enough of the market misinterpreting the Fed’s messaging and used the not uncertain terms we noted above to drive his point home.
As a result, the stock market and other risk assets that were betting on looser Fed policy sold off sharply. π
Despite the carnage in stocks, Bonds didn’t move at all. Unlike stocks that rallied over the last few weeks, interest rates were moved higher because the bond market knows that inflation and tighter policy are here to stay. The same can be said for the currency market where the U.S. Dollar rallied its way to 20+ year highs. π΅
Nobody was surprised except for the stock market. π
Lastly, today’s economic data confirmed more of the same. The Fed’s preferred measure of inflation, the core personal consumption expenditures index, rose 0.1% MoM to a 4.6% YoY reading in July. Despite it being below its February high of 5.3%, the Fed needs to see sustained progress lower before it’s ready to declare a victory over inflation. βοΈ
We’re not there yet and won’t be for many more months.
So yes, the stock market sold off on today’s news. But for anyone paying attention over the last few months (or reading our newsletter), today’s speech was a big ol’ nothingburger. π€·ββοΈ