Powell to navigate cautiously in upcoming speech on Fed’s future actions.
Federal Reserve Chairman Jerome Powell to Deliver Annual Speech at Jackson Hole Symposium
Federal Reserve Chairman Jerome Powell is set to give his annual speech on Friday and will try to offer a clear monetary policy vision while treading lightly given market volatility.
The Federal Reserve chief is the headliner for the Jackson Hole Symposium, which is held each year in Jackson Hole, Wyoming, and is hosted by the Kansas City Fed. Economists have descended upon the Jackson Lake Lodge for three days of speeches, dinners, and discussions, but Powell’s speech, slated for 10:05 a.m., is the main event.
Market Volatility Heightens Anticipation for Powell’s Speech
As investors anxiously await the speech, the Dow on Wednesday plunged by nearly 400 points, and the S&P 500 dropped by about 1.4%. The speech, given the content and the tone, could greatly move markets as all eyes turn to Jackson Hole.
Economists, investors, and reporters will hang on every word that Powell says, hoping to glean some insight into where his thinking is on monetary policy. The speech has the ability to move global markets, as was evinced by last year’s address, which caused the Dow Jones Industrial Average to plunge 1,000 points.
The main thing that listeners will be tuned in for is to see whether central bank officials might raise the Fed’s interest rate target one more time this year. In the Fed’s most recent “dot plot” released in June, most Fed officials predicted one more increase this year. But more recent economic data has shown meaningful inflationary improvements, leading many to think that the Fed might be done tightening.
Impact on Markets and Stocks
If Powell strikes a hawkish tone, as he did last year, and makes it seem like another rate hike might be on the menu, markets will likely fall, perhaps by a large margin. Rate increases naturally squelch demand so any indication of another rate revision is bad news for stocks.
Conversely, if Powell hints that recent favorable economic developments are moving the needle closer to a pause, stocks would likely rise.
Bill Adams, chief economist for Comerica Bank, told the Washington Examiner that while Fed chairs sometimes use the Jackson Hole speech to announce big changes to their monetary policy strategy, given the current situation, Powell will likely not announce anything too unexpected. He noted that members of the Federal Open Market Committee, which votes on rate hike decisions, appear to be at least somewhat divided on how best to proceed.
“Chair Powell in his role as Fed chair speaks for the FOMC as a whole and since there is some disagreement among its members about what to do next, he is probably going to give pretty limited guidance to what their next move will be,” Adams said.
It is also complicated because inflation numbers can be looked at by two different people who can assess two different stories about what the data tell.
Inflationary Concerns and Monetary Policy
Headline inflation declined to a 3.2% annual rate in July, increasing just 0.2% from June to July. That is nearing the Fed’s 2% annual inflation goal as 0.2% monthly inflation would equate to 2.4% annual inflation if that level held steady for a year.
On the other hand, “core inflation,” which strips out volatile food and energy prices and is considered to be an indicator of sticky inflation, is still running at a 4.7% annual rate (although in July it also only ticked up 0.2%). Sticky inflation is inflation that doesn’t respond quickly to changes in demand.
“Inflation has been a little bit sticky. … It’s still a little sticky when you look at core,” Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program, told the Washington Examiner. Marks said he expects another rate hike, or perhaps even two more given the economic conditions.
Powell has made taming inflation his top priority, so, looking through the hawkish lens, he might think it a safer bet for long-term inflationary stability to do one more rate hike.
But investors think that the Fed is most likely done hiking. About 83% think that the Fed will hold rates steady, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
One topic that Powell will likely discuss is how the Fed’s policy action has affected the housing market. Mortgage rates have risen to highs not seen since the turn of the century because mortgage rates rise when the Fed’s rate target increases so another rate increase, or even the mere perception that one is coming down the pipeline, would send mortgage rates even higher and make housing affordability an even bigger challenge for consumers.
As of Thursday, the average rate on a 30-year fixed-rate mortgage was sitting at soared to 7.36%, according to Mortgage News Daily. The last time rates were this high was November 2000.
The speech also comes after a turbulent year in the banking sector. The sudden failures of Silicon Valley Bank and Signature Bank caused the Fed to step in and attempt to calm the industry.
“He’ll probably talk about the stability of the banking industry. … He’ll talk about the credit tightening that the banking industry has been doing,” Marks said of Powell.
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