After two weeks of increasingly nervous trading, Wall Street erupted in cheers and applause following Federal Reserve Chair Jay Powell's long-awaited speech at Jackson Hole. His words appeared to soothe market worries, solidifying gains after a period of uncertainty.
Despite acknowledging progress, Powell made it clear that substantial changes are unlikely in the ongoing battle against US inflation. His message, delivered at a central bankers' event in the picturesque wilds of Wyoming, resonated well with market participants.
The market landscape at the end of the week presented solid gains for Wall Street, a gentle decline in gold prices, strengthening oil prices, and a modest drop in US bond yields during the trading session.
While the Dow experienced a weekly dip, the S&P 500 and Nasdaq saw a rise, marking the end of three weeks of unease over the potential impact of Powell's speech.
Considering market reactions (notably, 10-year bond yields retreated from their 17-year highs earlier in the week), Powell's remarks were received as reassuring and even bullish. However, his statements weren't overtly optimistic; they simply didn't induce enough fear to trigger an overreaction.
The essence of his message was caution. Powell stressed the Federal Reserve's careful approach due to persistently high inflation rates and the potential for rate hikes. For market hawks and those wary of rate increases, Powell's observations posed no immediate threats.
Powell conveyed the Fed's flexibility in contemplating future actions but refrained from indicating a readiness to initiate easing measures in the near term. His tone was generally bullish, prompting some to speculate about potential rate cuts.
"While inflation has decreased from its peak—indeed, a positive development—it still remains too high," Powell stated during his speech. He remained vigilant for signs that the economy's cooling might not be as anticipated and indicated preparedness for further rate hikes.
Comparisons were drawn to Powell's speech at Jackson Hole the previous year, during which he warned of impending challenges in the Fed's efforts to rein in runaway inflation and achieve its 2% goal. Notably, inflation had plummeted from its peak of 9.1% in June 2022 to around 3.2% at the time of the speech.
Powell's remarks emphasized the early stage of building confidence in inflation's sustainable decline. Despite favorable summer data showing reduced price pressures in June and July, Powell cautioned that sustained progress required more than just a few months of positive indicators.
Powell expressed concerns over both inadequate and excessive policy measures, highlighting the delicate balance between preventing entrenched above-target inflation and avoiding unnecessary economic harm.
Market expectations around future interest rate cuts have evolved. Earlier predictions of rate cuts by early next year have shifted, with most traders now envisioning no cuts before mid-2024 at the earliest.
Shane Oliver, AMP Chief Economist, noted that Powell retained a tightening bias, acknowledging the Fed's commitment to addressing inflation. Powell's stance and data-dependent approach support cautious advancement, considering lag times, tightened financial conditions, and potential risks of over-adjustment.
As Jackson Hole concludes, attention turns to upcoming events. The week includes the release of start-of-month US jobs data for August, ahead of the Labor Day long weekend and the symbolic end of summer. This heralds the race toward the year's close.
Before that, the second estimate of US economic growth is anticipated, potentially sparking renewed concerns about interest rates. Additional data on job openings, resignations, and personal consumption expenditure and prices (a Fed-preferred metric) are also anticipated.
The week also wraps up the US June-July quarterly reporting season, capping a period of speculation and anticipation for market participants.