Speaking in Jackson Hole, Fed chairman Jerome Powell poured cold words all over the recent market rally.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
He said lowering inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month.
I’ll stick with my guess of 75 bp for that next move.
And the market did what, in all probability, Powell had hoped, selling off fairly sharply.
Writing for Bloomberg, Jonathan Levin explains:
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, just said what markets have long suspected but what active central bankers haven’t dared to admit: Markets need to go down — in fact, that’s the point of the Fed’s interest-rate increases and marathon jawboning. And that was the objective of Fed Chair Jerome Powell’s annual speech in Jackson Hole, Wyoming, which triggered the worst equity market selloff since June.
Here’s Kashkari’s quote to Bloomberg’s Odd Lots podcast with Joe Weisenthal and Tracy Alloway:
“I was actually happy to see how Chair Powell’s Jackson Hole speech was received,” Kashkari said in an interview with Bloomberg’s Odd Lots podcast on Monday, reflecting on the steep drop after Powell spoke. “People now understand the seriousness of our commitment to getting inflation back down to 2%.”
On one hand, the sentiment is obvious. Since early in the year, it’s been clear that buoyant markets ran contrary to the Fed’s stated objective of fighting inflation. The central bank has crude tools, and one of them is to curb the demand side of the supply-demand equation by making people feel a little poorer, as I wrote in March when the Fed was starting its interest-rate campaign. My Bloomberg Opinion colleague Bill Dudley, who served as president of the New York Fed, shared that view in his piece “If Stocks Don’t Fall, the Fed Needs to Force Them.”
It’s worth quoting this passage from Dudley’s article:
In contrast to many other countries, the U.S. economy doesn’t respond directly to the level of short-term interest rates. Most home borrowers aren’t affected, because they have long-term, fixed-rate mortgages. And, again in contrast to many other countries, many U.S. households do hold a significant amount of their wealth in equities. As a result, they’re sensitive to financial conditions: Equity prices influence how wealthy they feel, and how willing they are to spend rather than save.
The wealth effect can work in both directions.
I suspect that Powell may also have been concerned that the market’s recovery might have been a sign that his anti-inflationary message was not resonating in the way that it should, a problem as the management of expectations is an important inflationary tool. Read the sections in Paul Volcker’s autobiography dealing with his early months in office and you can see that he had somewhat similar worries after seeing the market response to his initial anti-inflationary efforts (although in that case markets — deeper into an inflationary era — were underwhelmed rather than complacent: The dollar fell “and the price of gold hit a new record”). This played no small part in Volcker’s pivot to the far tougher approach he unveiled on October 6, 1979.
The market paid attention, and eight days later the author of a piece in the New York Times was referring to “the great crash of 1979.”
This was, incidentally, no relation to The Crash of ’79, an enjoyable financial thriller (if I recall correctly: It’s been, uh, a while) by Paul Erdman, a former banker who had begun his career in fiction in a Basel prison with, if he is to be believed, a little help from a French safecracker, but that’s another story.