When Federal Reserve Chairman Jerome Powell spoke at the Fed's annual Economic Policy Symposium in Jackson Hole, Wyoming, (1)
he did not mince words. It was clear that the Fed's "overwhelming priority" is pulling back inflation from the fastest pace in four decades. The Dow Jones Industrial Average reacted the following day with a decline of more than 1,000 points as investors priced in higher interest rates, slower economic growth and higher unemployment. (2)
In a brief speech at the conclusion of the Symposium, Powell signaled the Fed is likely to keep raising interest rates and leave them elevated for "quite some time" in an effort to stamp out inflation. Powell said restoring the annual inflation rate to the traditional 2% target is the central bank's "overarching focus" even though consumers and businesses will feel, in his words, "some pain". (2)
As we have stated before, the Fed is between a rock and a hard place (Aug 2022 Market Outlook
or Dec 2021 White Paper
), trying to guide today's inflation-laden economy to a soft landing (i.e., a controlled slowdown in economic growth that avoids recession ). We have written that inflation is the scariest boogeyman in economics. It's currently an 8%+ tax / pay cut on everyone. Whichever way you look at it, the net-effect is the same. Sadly, it's not realistic to believe the Fed can reduce inflation to the 2% target range without unemployment measurably increasing, a circumstance that will surely bring additional economic disruption.
Markets are now awaiting the Fed's September 21st meeting to see how the rate-setting Federal Open Market Committee will respond. The likelihood of a 3rd consecutive 0.75% rate hike increased significantly following Chair Powell's Jackson Hole speech. The decision, "will depend on the totality of the incoming data and the evolving outlook." (3)
Just how rare would a 3rd consecutive 0.75% increase be? Unprecedented. Of the last 96 rate changes (dating back 32 years to 1990), the vast majority – 67 – have been of the garden variety +0.25% or -0.25%, 22 have been either +0.50% (5 times) or -0.50% (17 times), and just 5 have been either +0.75% (3 times) or -0.75% (2 times). During that period, we have never had a +1.0% rate hike, only twice had a -1.0% rate cut (once during the Great Recession of 2008 and once at the beginning of Covid), and never had three consecutive 0.75% rate increases.
Even in 1994, when many accused then Fed Chair Alan Greenspan of over-doing the rate hikes, we only witnessed one 0.75% hike, the last increase in a six-part tightening campaign. (4)
|Date of Rate Change
|Feb 4, 1994
|Mar 22, 1994
|Apr 18, 1994
|May 17, 1994
|Aug 16, 1994
||Nov 15, 1994
Powell noted that the Fed's failure to act forcefully in the 1970s caused high inflation in the early 1980's that led to the draconian rate hikes required to finally break the cycle. In that case, then-Fed Chairman Paul Volcker pulled the economy into recession to tame inflation. "The fed funds rate began the decade at a target level of 14% in January 1980. By the time officials concluded a conference call on Dec. 5, 1980,... the target range [was] 19-20%, its highest ever." (5)
Powell, while stating repeatedly that recession is not an inevitable outcome for the US economy, highlighted that history provides the current Fed with three lessons: 1) central banks are responsible for managing inflation, 2) managing expectations is critical and 3) "we must keep at it until the job is done." (3)
It sounds like the Fed is fully committed to the inflation fight regardless of the pain that will be inflicted on the economy and the stock market. While we, at WT Wealth Management, don't welcome economic disruption and higher unemployment for the US economy, Jerome Powell, as the Chair of the Federal Reserve, doesn't really have another reasonable choice. The US economy is not built to sustain high, long-term inflation. We therefore support the Fed's efforts to tame it and accept the associated economic cost.
- The Kansas City Fed's Jackson Hole Economic Policy Symposium
- Powell comments fuel 1,000-point market rout Friday as stocks slide for a second week
- Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation
- Federal Funds Target Rate History
- Fed’s interest rate history: A look at the fed funds rate from the 1980s to the present