Bassanese Bites: Fed blowtorch – August 29 2022
Week in review
As expected, the market highlight last week was the all-important Jackson Hole speech by Fed Chair Jerome Powell. And he did not disappoint! His speech was short and focused lest there be any further market misinterpretation of his thinking.
In essence the Fed is resolutely focused on bringing down inflation to 2% before it has a chance of filtering through into inflation expectations – even at the risk of recession. Powell regards the early 1970s period where inflation was allowed to remain high and variable as a terrible policy mistake, and he continues to praise the work of Fed chair Paul Volker in breaking the back of inflation with tough medicine in the early 1980s.
Ominously, Powell suggests getting inflation down to where it needs to be “will take some time” and will likely require a “sustained period of below trend economic growth” brought about by achieving and maintaining a “restrictive policy stance for some time”. Households should expect “some pain” in the months ahead.
It also seems likely the Fed will hike by a further 0.75% at the September meeting, given he indicated a slowing in the pace of increases will only be appropriate “at some point, as the stance of policy tightens further”.
