Jerome Powell Finally Steps His Foot Down

Jerome Powell finally stood his ground on the Fed’s policy position at this past week’s Jackson Hole Symposium. We could argue that he has been reiterating his goal to combat inflation over sustaining a strong market since the prior quarter. However, there was a much stronger tone in his Jackson Hole Speech this time around. A speech that was concise and left little to the imagination. Compare this to the published federal minutes and rate decision meetings, where he started his speech hawkish but left dovish tones during the Q&A section. The overall message of last Friday’s speech was as follows: 

1. Price Stability is the number one focus.
2. The Federal Reserve is aware that the cost of bringing down inflation means causing “pain” for everyone, but it is something they must do.
3. Inflation must be combatted “unconditionally” until the job is completed.

As a result of this hawkish message, it became painfully clear that the market, at least in the short-term, understood the message this time. During the speech, all three major indices made a failed attempt at another rally. The market responded with a crash to the downside after what I believe to be essential points, Powell’s remarks:

“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. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

“Our responsibility to deliver price stability is unconditional.”

As of the close, the Nasdaq was down over 4%, S&P 500 down 3%, DOW Jones 3%, and Russell 2000 3%. Within the past month, we’ve seen tremendous comebacks from such market drops. However, with liquidity picking up in the next couple of weeks and a much stronger tone from the Federal Reserve, do we see a new downtrend reemerging? Only time will tell. Market data heavily drive interest rate decisions. If we see continued inflationary pressures declining as we’ve seen with the PCE and PCI, perhaps the Fed’s tone will change. Until then, I’m seeing the market as getting a “reality check” that the Federal Reserve does not have the market’s back this time as they did for the past 15 years.