US Federal Reserve Chair, Jerome Powell, warned against loosening monetary policy early, in remarks made at Jackson Hole, noting that interest rates will have to keep rising to bring inflation under control.
What Happened?
At the annual Jackson Hole event, Chair Powell shared remarks around the trajectory of monetary policy from here. He warned against loosening policy early and noted the experience of the 1970s and 80s in particular, when high inflation expectations got entrenched in the system. He noted that policy will have to get more restrictive from here to bring inflation down meaningfully and kept a 75bp interest rate hike on the table for September.
Our interpretation
Given the easing of financial conditions since early July, this pushback against any premature market expectation of a pivot towards looser policy was expected. However, Powell’s pushback was harder than anticipated, as shown by the specific reference to the 1970s/80s. In recent days, a variety of the Federal Reserve (Fed) speakers have been warning against premature talk of an end to the Fed cycle and impending cuts next year triggered by soft inflation data in July. Today, Chair Powell seems to have thrown his weight behind the hawks. He acknowledged economic pain resulting from this policy but warned that letting higher inflation get embedded would be far more painful. In terms of data, the US labour market remains strong whilst housing market activity is showing the clearest signs of a sharp slowdown.
Our outlook
We think 75bps in September is possible as the Fed tries to reverse the easing in financial conditions which has occurred since end-July. We also think that the terminal rate in this cycle is now likely to reach 4 per cent as the Fed further front loads the hiking cycle. The pushback from the Fed has been stronger than market expectations and we would expect a period of heightened volatility as new steady state parameters set in. From an asset allocation perspective, we remain cautious on risky assets especially with Chair Powell countering evidence of any perceived pivot by the Fed and as hard landing probabilities begin to rise again.
