Federal Reserve President Jerome Powell delivered a more “hawkish” message than expected at the Jackson Hole symposium. The manager warned that the US economy is more reluctant to hike interest rates than expected and that if growth continues to come in above expectations, “the progress we’ve made in reducing inflation could be wiped out, leaving us to raise interest rates further”.
Powell has made it clear that they are still waiting for the data before making a decision and that they will raise interest rates “if necessary” in the next few meetings. However, his warning focused on the difficulty of calculating whether rates have already risen enough or may be undercut. And with that in mind, he has warned that GDP and job growth data will be crucial in making decisions. In other words, it’s good that the economy isn’t suffering much damage, but it would be worse than trying to avoid a recession because inflation will end up entrenching. And the Fed doesn’t want to risk it.
The Fed President has celebrated the good numbers of the past few months, albeit with caution, because “two months of good data is just the beginning to inspire confidence,” recalling his concern because “we don’t know where the Core inflation is going to settle’. His mantra remains the same, as he reiterated after the Fed’s most recent FOMC meeting: “We will be cautious in interpreting the data.”
As for the state of the economy, Powell, in his overview of key indicators, welcomed the decline in durable goods inflation as post-pandemic supply chains have normalized and the sharp slowdown in the housing market, which is still evolving towards a return to pre-pandemic averages. Conversely, he remains concerned about the labor market, particularly given that “real wages are rising while inflation is falling,” slowing price declines.
Wall Street doesn’t like the tone
Powell’s words didn’t sit well with Wall Street. Major indices in the United States have faltered following his new “threats” of rate hikes. The Dow Jones is down half a point, transitioning from a green start to flat trading and struggling not to slide into the red. Same scenario for the S&P 500, which while still positive, up 0.14%, has suddenly dropped another half a point. The Nasdaq, which started the session with great volatility, is also showing resistance in the green (+0.22%) after starting with gains of more than 0.7%.
However, the dollar reacted strongly to the Federal Reserve Chairman’s words and rallied sharply, hitting $0.93. According to the President, the yield on the ten-year US bond has also risen and is now at 4.27%.
These forecasts fueled the possibility of another rate hike, even as investors assumed the cycle of 11 rate hikes was over and all that was left was to keep rates high to fight inflation. Still, the strength of the US economy and its job market could give the Federal Reserve reason to go further and try to bring CPI back towards the 2% target.
The latest US GDP data showed growth of 2.4%, rising despite central bank action. On the other hand, the labor market has shown its resilience in recent records as the unemployment rate has fallen again, falling from 3.6% to 3.5%, maintaining full employment.
And while this data gives confidence about the progress of the economy, inflation remains high at 3.2% overall due to lower gas or crude oil prices but still stands at 4.7% (excluding fresh food and energy). While this is the lowest rate since October 2021, there is still some way to go, and the Fed may be tempted to accelerate rates with a solution the market has stopped considering.
