Douglas Rissing
By Olumide Owolabi
During his speech at the Jackson Hole Symposium, the Fed chair was clear about keeping policy rates restrictive for longer.
As expected, Federal Reserve Chair Jerome Powell’s much-anticipated speech at the Jackson Hole Symposium clearly affirmed the Fed’s playbook: To tighten policy enough to bring inflation down to target and keep it there “until we are confident the job is done.”
Powell also acknowledged that taming inflation will likely lead to a sustained period of below-trend economic growth and “some pain to households and businesses,” though he warned that failure to restore price stability would result in far greater discomfort.
Powell’s speech made it clear that the Fed is taking a similar page from another playbook – that of former chairman Paul Volcker, who hiked rates to stem runaway inflation in the late 1970s and early 1980s.
Here are a few of our takeaways alongside relevant quotations from the speech:
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Interest rates will move higher and remain in restrictive territory for longer than the market currently expects. “Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
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The length of time required to drive inflation to low and stable levels remains uncertain. “It could be a lengthy period of very restrictive monetary policy that will ultimately be needed to stem the high inflation.”
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A soft landing may well be difficult to achieve. “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”
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September’s rate decision remains data-dependent. “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.”
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As previously communicated, the Federal Open Market Committee expects the pace of rate increases to decline. “At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”
Unsurprisingly, price action in rates was muted as investors braced for a hawkish speech with short positions in Treasury and Eurodollars futures.
Overall, we don’t see a major near-term shift from the Fed, as highlighted by Powell’s colleagues ahead of the symposium. We think the “restrictive for longer” narrative stays firmly in place, though uncertainty remains as the Fed attempts to marry data dependence to the pace of rate hikes.
We continue to expect flatter yield curves, with the federal funds rate settling between 3.25% and 3.75% by no later than the first quarter of 2023, with a tail risk of 4.00% to 4.50%, conditional on the inflation trajectory.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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