At the Federal Reserve's annual monetary meeting in Jackson Hole, Wyoming, Chair Jerome Powell struck a pretty hawkish tone as he focused on the fight against inflation, warning that it would cause economic pain including job losses and a slowdown in economic activity.
The speech also crushed the hopes of many bulls who were looking for some sort of pivot even in terms of slowing the pace of rate hikes, given that there has been positive news on the inflation front. This included the personal consumption expenditure data which came out earlier in the day and showed that inflation was negative on a monthly basis and decelerating on an annual basis.
However, some market observers noted that the speech was less for financial markets and more for the Washington DC crowd to establish that Powell and the Fed are serious and committed to fighting the inflation threat. He also seemed to push back against the market's notion that the Fed could be cutting rates early next year.
Specifically, he remarked that "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."
Following the speech, stocks gave up their initial gains and plunged lower. In contrast, bonds found a bid. This was largely due to Powell saying that the Fed will stay on the course until inflation gets close to its 2% goal. He also noted that history shows that in battling inflation, there is a risk of premature easing.
The next FOMC meeting is in September. Currently, odds indicate a 75 basis points hike or a 50 basis point hike. After Powell's speech, the odds of a 75 basis point hike edged higher.
Powell devoted a considerable amount of time during his speech to talk about previous episodes of inflation in the 70s and 80s. In the 70s, he said the Fed didn't act forcefully enough which resulted in the draconian monetary policy of the early 80s when Chairman Paul Volcker lifted the Fed funds rate above the inflation rate, leading to a brutal recession but succeeding in actually taming inflation.
Powell said that the Fed can avoid this mistake by acting with resolve now and not stopping until the job is complete.