Discussion
One of the key pushbacks against Powell’s Jackson Hole 2022 speech was that he didn’t have to take questions afterward as he does at his post-FOMC meeting press conferences, the thought being he wasn’t really as hawkish as he sounded. The key in assessing the validity of his hawkishness was monitoring the overall communication package that came out of Jackson Hole. Same framework applies this year.
Per usual, the consensus view of Jackson Hole 2023 not only skews dovish but completely misses the broader tightening program “forest” from the narrow tactical rate hike “trees”. Since Powell’s speech, the entirety of the market consensus has been laser-focused on his use of “careful” in describing how the Fed was likely to precede from here even if the economy reaccelerates, while ignoring the fact he told us the Fed is highly unlikely to cut rates before YoY core PCE inflation falls to its pre-pandemic average (see chart below from his speech). And that’s just one offsetting piece of hawkish guidance.
The broader package of communication coming out of Jackson Hole 2023 emphatically confirms Powell’s hawkish speech:
On Saturday FRB Cleveland President Loretta Mester said that her September SEP submission is unlikely to include rate cuts in 2024 as it did in June. This is very specific messaging, the second time in as many days.
Nick Timiraos’s capstone Jackson Hole 2023 piece was blazingly hawkish.
First and foremost it ended with Mester saying: “‘I would probably opt for doing an extra [rate increase], and then if it turns out the economy’ is slowing faster than anticipated, ‘I’d be more willing and flexible with bringing [rates] down sooner than I thought.’” It’s always important what the article ends with. This is telling the market the Fed is willing tip the economy over and try to pick it up later with surgical adjustments to Fed Funds. The market has no idea how far behind the curve the Fed is going to be when it gets to that point (intentionally so, I might add).
Second, the dovish Goolsbee was quoted as saying: “…if newer, innovation-intensive investments are in fact more sensitive to higher rates, the Fed can more easily slow economic activity.” Willing to slow innovation spending???
Third, and perhaps most importantly, the article called out Christine Lagarde as gesturing to Powell when referring to the fact central bankers are under political pressure.
Equity and fixed income bulls need to pray that something, anything “snaps” before the September SEP is constructed. This FED wants higher long-term interest rates, they are going to take rate cuts out of 2024, they are going to raise R*, and they’re not going to stop until the economy loosens substantially from here. With core nonhousing services inflation set to reaccelerate in coming months, it’s just a really ugly set-up right now for both the economy and financial markets hanging on the hope that the Fed adopts a higher inflation target in order to allow the economy to reaccelerate and the unemployment rate to stay low.
Stay buckled.
Point 'b' about "innovation-sensitive investments" might be a euphemism for startups (tech wannabe companies) that are app-enabled and usually consumer facing. Unprofitable, unproductive garbage companies that never should have been funded in the first place. Russell 2000 index has many of them. They won't survive.