The Fed—Do You Hear Me Now?

Fed Chairman Powell delivered a forceful and unequivocal message today at Jackson Hole, pushing back against market expectations of an early pivot back to rate cuts. Restoring price stability will require tight monetary policy for some time, he said, and the Fed will not waver when the labor market starts feeling the pain. Markets have taken notice, but will test the Fed’s resolve again, making for a volatile adjustment process in asset prices. Our Fixed Income CIO Sonal Desai shares her thoughts:

Federal Reserve (Fed) Chair Jerome Powell delivered a forceful and unequivocal speech at Jackson Hole today—the speech he should have given six months ago, in my view.

Powell realized he needed to push back against financial markets: investors still expected this hiking cycle to be short-lived and quickly followed by new rate cuts; this belief translated into easier financial conditions, making the Fed’s inflation-fighting job even harder.

In a concise speech, Powell therefore set out a clear and well-structured message:

  1. He stressed at the outset that price stability is “the responsibility of the Federal Reserve and the bedrock of our economy,” because without price stability we cannot have a “sustained period of strong labor market conditions that benefit all.” This is a crucial statement: it signals that today the Fed’s dual mandate boils down to the single goal of reducing inflation.
  2. Restoring price stability will take time; history shows the dangers of prematurely loosening policy, and the Fed will therefore maintain a tightening stance until it is convinced that its job is done.
  3. This will be painful for households and businesses: to reduce inflation, the Fed has to reduce aggregate demand and raise unemployment. But any delays in disinflation would make the employment cost even higher—which signals that the Fed will not waver as the labor market begins to deteriorate.

The speech stressed the need to cool off economic activity: Powell noted that the US economy still enjoys strong underlying momentum. He pointed out that while supply shocks have contributed to global price trends, US inflation is also driven by excess demand. The US labor market in particular is “clearly out of balance.”