The central theses
- Fed Chair Jerome Powell spoke briefly in Jackson Hole, Wyoming this morning to address the fight against inflation.
- While hailing the more upbeat CPI numbers for July, he said they fall far short of enough to indicate the job is done.
- Chairman Powell warned of continued “restrictive policies” in the coming months, casting a shadow over risk-on markets.
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Federal Reserve Chair Jerome Powell speaking at the central bank’s annual meeting in Jackson Hole this morning warned against tightening policy “for some time”. The risk markets are shaken after his statements.
Fear and Loathing
Jerome Powell made a brief but powerful statement today that rocked the markets.
Speaking at the Fed’s annual meeting in Jackson Hole, Wyoming, Chairman Powell said that “the overall focus of the Federal Open Market Committee at this time is to bring inflation back to our 2% target.”
To achieve this goal, Powell alluded to aggressive rate hikes in the coming months, arguing that successfully curbing inflation would require a sustained hawkish stance on the federal funds rate. “Restoring price stability will take time and will require vigorous use of our tools to better balance supply and demand,” he said. “Reducing inflation is likely to require a sustained period of below-trend growth.”
This indication of a “continued bout of below-trend growth” appears to have confirmed traders’ worst fears in risk-on markets. Since Powell’s comments this morning, the Nasdaq is down 4%, or 497 points, and the Dow Jones Industrial Average is down 1,008 points, down 3%. Even the S&P 500 took a 3.5% discount on Powell’s comments, losing 141 points on the day.
Crypto markets were also hit today, which is not surprising if interest rates are set to rise in the near future. Similar to the major stock indexes, Bitcoin is down 4% today at $20,727; ETH, on the other hand, plunged 8%. The second largest cryptocurrency by volume rallied this week as the Ethereum Foundation finalized planning details for the merger, but today’s comments from Powell have all but erased those gains.
The Fed chair was as clear as ever about the prospect of tough times. “While higher interest rates, slower growth and weaker labor market conditions will lower inflation, they will also cause some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation, but failure to restore price stability would mean far greater pain.”
Maintaining price stability is the Federal Reserve’s primary goal, as Powell noted in his speech this morning. Earlier this month, CPI prints showed inflation set to settle at 8.5% in July. Markets rallied on the news, but Powell warned his audience not to get too confident too quickly. “While lower inflation readings for July are certainly welcome,” the Fed chair said, “a single month’s improvement falls well short of what the committee needs to see before we are confident that inflation is coming down.”
In conclusion, Powell stressed some conclusions about historical precedents in dealing with inflation, and stressed the dangers of abandoning effective policies too early, which may leave important work unfinished or even undo what has been achieved to this point. “Restoring price stability is likely to require maintaining a tightening policy stance for some time,” he said, noting that a sustained period of tightening policies is likely on the horizon.
As crypto enters its eighth month in a bear market, Powell’s words are far from reassuring to those hoping for bullish momentum in the near future. While Ethereum Merge could revive the market in mid-September, few other obvious bullish catalysts are in sight at the moment; Therefore, the short-term macro climate does not seem to bode well for risky assets like cryptocurrencies.
Disclosure: At the time of writing this article, the author of this article owned BTC, ETH and several other cryptocurrencies. This material is for educational and informational purposes only and does not constitute financial advice.
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