The Word From Jackson Hole

In the 1970s, the Federal Reserve Board of Kansas City put on a series of three-day symposiums and invited economists, central bankers, and journalists to the Great American West to discuss the day’s topics.

Former Fed Chair Paul Volker, who famously broke the back of inflation, liked to fly fish, so he steered the conference to Jackson Hole, Wyoming, in 1981, where it’s stayed ever since.

The event became a ‘must watch’ event in the years just before and after the 2008 Global Financial Crisis as the relatively newly appointed Chair at the time, Ben Bernanke, dealt with the crisis. Importantly, he laid the groundwork for various rounds of quantitative easing in 2010-2012.

As noted above, Chair Powell spoke last week and carried on the tradition of delivering important insights into where the Fed is headed.

The speech came at an important time for markets. The first six months of this year were a rough start because stocks and bonds fell sharply due to ever-higher inflation data.

In July, though, inflation came in lower than expected, and stocks and bonds rallied on the theory that the end was in sight for Fed hikes and the worst was behind us.

Powell’s speech in Jackson Hole didn’t reinforce the market’s view, which is why stocks and bonds sold off so sharply on Friday.

Instead, Powell said that to reduce inflation successfully, the Fed would have to “keep at it until the job is done.”

In doing so, he further said that the hikes would probably result in lower economic growth for “a sustained period” because interest rates would need to stay high “for some time.”

He said there would “very likely be some softening in the labor market” and “some pain” for households and businesses.

Importantly, he added that “a failure to restore price stability would mean far greater pain” and “the longer the current bout of inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”

Markets realized almost immediately that the Fed had no plans to alter its stance, as they had apparently expected going into the speech. Hopes for a ‘Powell Pivot’ were dashed.

In a sense, nothing changed – the Fed is going to continue to do what it has been doing, which is probably the right course of action. Market expectations got a little ahead of themselves, and the speech brought expectations back into line.

The next actual Fed meeting (as opposed to a symposium) is three weeks from tomorrow, and it’s reasonable to expect a lot of noise between now and then. Right now, markets are still expecting a three-quarter of a percent hike, but that is likely to float around in the coming weeks.

Sadly, our view of the markets in the next few weeks may not be as pretty as the views of the Grand Teton mountains outside of Jackson Hole. Then again, markets surprise me all of the time.