Fed Chair Powell speaks at Jackson Hole

Chair Powell on "navigating by the stars under cloudy skies"

• At the Federal Reserve Bank of Kansas City's Jackson Hole Symposium, Federal Reserve Chair Jay Powell gave a much-anticipated speech titled, Inflation: Progress and the Path Ahead. 
• Chair Powell kicked off his remarks re-iterating the Fed's 2% target, and its commitment to attaining that goal. Powell outlined the decline in inflation so far, and acknowledged the welcome cooler inflation readings in past two months. However, he then emphasized that there is "substantial further ground to cover to get back to price stability."
• On the inflation outlook, he discussed the three key parts of inflation in more detail, but stuck to his past messaging that "getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions." In terms of inflation details:
  • He noted that sustained progress on core goods prices is needed. 
  • On the services side, that housing services inflation has recently begun to fall, and the process is expected to continue given the well known lags (see report), but they will be watching market rent data closely. 
  • Finally, inflation in non-housing services , aka "supercore",  has finally started to decline on a three and six-month basis, and "further progress will be essential to restoring price stability". But that "over time restrictive monetary policy… reducing inflationary pressures in this key sector."
• On the economic outlook, he pointed out that there is evidence that higher real long-term yields (up about 150 basis points since last year), and tighter financial conditions are contributing to slower growth in the economy. But that more recently, growth has remained above trend, and consumer spending has been picking up. Powell also noted that the labor market is rebalancing but the process remains incomplete. On both scores the speech emphasized that if progress is no longer being made, it would also call for a "monetary policy response" – aka further rate hike(s). 
• Before concluding he acknowledged that the uniqueness of the current cycle causes additional uncertainty for policymakers. For example,  job openings have declined substantially without a rise in the unemployment rate. Therefore, the fed will need to remain "agile" in setting policy.
• As to where that policy is headed, given that they are "navigating by the stars under cloudy skies" he kept his options open. The Fed will "proceed carefully" on whether to tighten further or hold steady.   

Key Implications

• The Chair's speech at Jackson Hole is always a marquee economic event, but with the Fed at a pivot point in its tightening cycle, this year's speech was particularly important. Markets are trying to gauge whether the fed is in wait-and-see mode, and feels it can be patient and wait for past rate hikes to cool the economy and bring down inflation, or whether more rate hikes are required. Looking at the market's reaction immediately following the speech, the odds on future fed hikes didn't shift a great deal. The slim odds of a hike in September got slimmer, and the roughly 50% odds of a hike in November are every so slightly higher. Market odds on the first rate cut next year remain unchanged at June.  
• In recent weeks market pricing had likely moved in a direction the Fed liked, so Powell likely didn't want to rock the boat too much. The Fed is in wait and see mode, but has its finger hovering over the hike button if progress on cooler growth stalls. As discussed in our recent Q&A, the FOMC will likely to continue to talk tough, to prevent an undesirable give back in bond yields, as it watches the incoming data closely.   

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