Thomas Costerg, Pictet Wealth Management

Chairman Jerome Powell’s Jackson Hole speech was short and rather high level. Its main message was that the Fed is not ready to lower its guard on fighting inflation, even if this causes some pain to growth. It sounds like Powell does not want to be remembered as the Arthur Burns of the 2020s (many accuse Burns, Fed chairman at the time, of having been too complacent about inflation in the 1970s). That said, it did not sound like Powell was ready to ‘shock the system’ in the way Paul Volcker did in the early 1980s either.

Powell also used the speech to clarify comments he made in July that were seen as a message that the Fed, approaching the so-called “neutral rate” (2.5% in the Fed’s estimate), would soon stop hiking rates. In his Jackson Hole speech, Powell highlighted instead the need to move to a “sufficiently restrictive” policy stance. “Estimates of longer-run neutral are not a place to stop or pause”, he said.

Perhaps the main aim of the speech was to send a message to money-market traders that rate cuts in 2023 won’t happen. Powell hinted that the bar for cutting the policy rate would be very high due to the ongoing inflation risk. “The historical record cautions strongly against prematurely loosening policy”, the Fed chairman said.

The speech contained no clear signal about the outcome of the September Federal Open Market Committee (FOMC) meeting, but our view is that the Fed will moderate its rate hike to +50bps at the September meeting. However, that depends on further moderation in business surveys (we’ll watch the ISM indexes especially closely) and job growth. The Fed is still ignoring the ongoing deterioration in the housing market, currently THE main weak spot in the US economy. Our view is that the labour market, usually a “lagging” indicator, will slow at some point and that the Fed could end up hiking +25bps at the November meeting, and then decide to keep rates unchanged until the end of 2023 as the unemployment rate moves up. The risk to our Fed rate view is somewhat to the upside, especially if the labour market remains resilient and ‘decorrelated’ from GDP growth.

Meanwhile data released on Friday showed further softening in inflation pressure, which squares well with our view that US inflation has peaked and that there is no broad-based wage-price spiral (although we remain vigilant).