Evening Brief – 08.25.23
Job Not Done
Federal Reserve Chair Jerome Powell did not come out swinging like he did last year at the annual Jackson Hole Symposium in Wyoming, but his speech today can be summed up in three words: “job not done.”
Powell said the central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
“Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
Powell further cautioned that the process “still has a long way to go”, even with the recent progress made.
He doesn’t necessarily have an itchy finger to hike interest rates, but he did put the financial markets on notice that if several things go awry, particularly the economy potentially running hotter-than-expected, then a more restrictive policy stance is appropriate.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.
Meanwhile, the Fed Chair threw cold water on speculation that the central bank could raise its inflation target, an idea that has been fiercely debated mostly by academics in recent months.
“Two percent is and will remain our inflation target,” he said.
Powell also noted that since the August 2022 symposium, 2-year real yields are up nearly 250 basis points, longer-term real yields are up nearly 150 basis points, bank lending standards have tightened, and loan growth has slowed sharply.
All of which play a big part in a slowdown in growth. He pointed to weakness in industrial production and residential investment.
Despite some market speculation, Powell chose not to discuss where the longer-term, so-called “neutral rate” of interest might be in the post-pandemic economy.
“We cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint,” Powell said.
Unsurprisingly, there was no mention of interest rate cuts. The choices the FOMC faces are to either further raise interest rates or keep them high for longer.
A hawkish address, but admittedly not as hawkish as last year. Powell’s message caused little stir in the financial markets – the US dollar was little changed, interest rates were contained, and the equity markets closed higher.
The odds of a September rate hike remained little changed at 12%, while a November hike also held relatively steady at 36%. Meanwhile, May 2024 continues to post the highest odds of the first rate cut at 55%.