Louis Navellier offers the following commentary following Fed Chairman Jerome Powell’s speech at Jackson Hole:
The Fed Never Fights Market Rates
Fed Chairman Jerome Powell on Friday at the Kansas City Fed’s annual Conference in Jackson Hole, Wyoming, surprised both me and the stock market by being much more hawkish than I could have ever anticipated. First, Chairman Powell said that the Fed is not yet convinced that inflation has peaked, even though the core rate of inflation has been falling since March and the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index declined to 6.3% in July, down from 6.8% in June. Even more important to the Fed, the core PCE, excluding food and energy, declined to 4.6% in July, down from 4.8% in June.
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Second, Chairman Powell said “with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause” implying that there might be additional key interest rate hikes after September 21st. Trust me, the Fed never fights market rates, so after a 0.75% interest rate hike on September 21st, the federal funds rate will be at 3% and the Fed will be “neutral” and in synch with Treasury yields. Any further fine-tuning on interest rates would likely happen at the December FOMC meeting, since the November FOMC meeting is 6 days before the midterm elections when the Fed is reluctant to raise key interest rates.
Finally, Chairman Powell said “We must keep at it until the job is done,” implying that the Fed may continue to increase key interest rates well beyond September 21st. I should add that Powell also said that “Our aim is to avoid that outcome by acting with resolve now,” which implies that he wants September 21st to be the last Fed rate hike, but the Fed Chairman’s other hawkish comments drowned out that fact.
Historically, Fed Chairman Powell strives to be reassuring, not shocking in any way. Furthermore, Powell has already followed President Biden and Treasury Secretary Yellen by saying in unison that the U.S. is not in a recession, despite two straight negative quarters of GDP growth. Even more impressive, when Biden, Yellen and Powell were saying we were not in a recession, Wikipedia redefined what a recession was and cited the National Bureau of Economic Research that in the U.S. a recession is “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In other words, thanks to revisionist history, the U.S. did not have a recession in the first two quarters of 2022!
Interestingly, Bespoke Investment Group reported that the S&P 500 since 1979 tends to rally when the Kansas City Fed’s Jackson Hole Conference commences. This could be to the wonderful weather and dramatic scenery that makes everyone feel good. Additionally, the stock market tends to rally heading into the Labor Day weekend, so perhaps the Jackson Hole conference kicks off that rally.
One thing is certain, which is there is now more uncertainty after Fed Chairman Powell’s speech. The stock market does not like uncertainty and unfortunately, Chairman Powell did not paint a clear picture of where the Fed and inflation is heading.
