On August 26th, Jerome Powell spoke at the annual Jackson Hole Symposium. His speech, though short (only about 8 minutes), was very concise and a direct indication of the path the FED is willing to take to address inflation. “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.” Let’s take a look and dissect some other quotes from that speech.
“Restoring price stability will take some time and requires using our [FED] tools forcefully to bring demand and supply into better balance.”
The FED has a ‘dual mandate’ established by the US Congress, of which one of the mandates is price stability, the other being maximum employment. Price stability is defined by the FED as low and stable inflation of around 2% per year. As of last month’s headline inflation print we saw 8.5% year over year inflation which is around 4 times higher than what the FED targets. Additionally, employment seems to be strong and robust with the current unemployment rate as of the end of August at 3.7%. Though ‘maximum employment’ considers more than just the unemployment rate, economists typically agree a range between 3-5% to be healthy.
So with one mandate already met, maximum employment, it only makes sense to focus efforts on inflation. Additionally, Powell also remarked that price stability is needed for the economy to function. Without price stability, achieving maximum employment would be much more difficult. Price stability is the bedrock to a stable, robust economy and is needed to maintain maximum employment.
“The FED’s tools work principally on aggregate demand.”
Powell noted this fact in his speech, the FED has little control over the supply side of the economy. Jerome even noted that some of their actions like raising interest rates may cause pain for consumers and businesses. Though their actions may help mitigate inflation be reducing demand, supply-chain problems may still persist for some time to come. Powell goes as far to mention that a tick up in unemployment, i.e. ‘softening of labor market conditions,’ is acceptable to achieve their new focus on cooling inflation.
“The historical record cautions strongly against prematurely loosening policy.”
Obviously, the FED wants to avoid a full-blown recession. The FEDs ideal resolution is a soft landing. In other words, inflation normalizing to a 2% level while dodging a slowdown in the economy. However, they do recognize that pulling off the tightening schedule too early may reignite inflation.
Investors continue to face uncertainty as we head into the fall months. All eyes are on the impact of the Fed’s commitment to fight inflation, even at the expense of the labor market and economic growth. The September policy meeting will be watched with bated breath. Whether or not inflation has peaked remains unknown, but data suggests the worst may be behind us. There are signs of supply chain pressures easing. That said, we are likely to continue to experience inflation levels above the Fed’s two percent target for some time. Corrections and recessions, while often uncomfortable, are not abnormal. Maintaining a disciplined and long-term approach to investing, in our view, affords the best opportunity to achieve one’s long-term investment objectives.
*Hedge fund returns are lagged 1 month. Sources: Factset, J.P. Morgan, Russell, MSCI, FTSE Russell, Alerian.
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