Federal Reserve Chair Jerome Powell delivered an address this morning at the central bank’s annual Jackson Hole meeting in which he warned of tightening policies “for some time.” Risk markets have shuddered in the wake of his comments.
Speaking at the Fed’s annual meeting in Jackson Hole, Wyoming, Chair Powell said that “the Federal Open Market Committee’s overarching focus right now is to bring inflation back down to our 2% goal.”
Powell set the stage for aggressive rate hikes over the coming months, arguing that successfully reducing inflation would require prolonged hawkishness in the federal funds rate. “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he said. “Reducing inflation is likely to require a sustained period of below-trend growth.”
This reference to a “sustained period of below-trend growth” appears to have confirmed traders’ worst fears in risk-on markets. Since Powell’s comments this morning, the Nasdaq plunged by 4%, or 497 points, and the Dow Jones Industrial Average dropped 1,008 points, a 3% decline. Even the S&P 500 took a 3.5% haircut after Powell’s remarks, dropping 141 points on the day.
The Fed chair spoke as starkly as ever about the prospect of rough times ahead, “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,” Powell said. “These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.”
Ensuring price stability is the primary goal of the Federal Reserve, as Powell noted in this morning’s speech. Earlier this month, the CPI print revealed inflation to be leveling off in July at 8.5%. Markets rallied on that news, but Powell warned his audience not to become too confident too quickly.
“While the lower inflation readings for July are certainly welcome,” the Fed chair said, “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”
Powell stressed the dangers of abandoning effective policies too soon, which can leave vital work unfinished or even undo what had been accomplished to that point. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said, indicating a sustained period of hawkish policy was on the horizon.