Each year, the Federal Reserve Bank of Kansas City hosts the Jackson Hole Economic Symposium, attended by global central bankers, policymakers, economists, and academics.1 Given the topics covered on the yearly agenda and the prominence of the attendees, markets pay close attention to the speeches made at the Symposium and in particular, the opening remarks of Federal Reserve Chairman Jerome Powell.

1 Editor’s note: Would love an invite...

Despite the eagerness of market participants for Chair Powell to offer clarity around the Fed’s future rate policy path, Powell stayed true to form during his remarks—essentially reiterating comments that he and other Fed speakers have made previously regarding data dependence and leaving themselves plenty of rate-path optionality.

To summarize Powell’s speech:

  1. The Fed will remain data-dependent. Strong economic and inflation data could prompt further hikes, while softening data could prompt a prolonged pause. Note: There was no discussion of rate cuts.
  2. While inflation numbers have eased in the past two months, the Fed believes that inflation is too high and the process “still has a long way to go.” Rates will remain restrictive until they have greater confidence that inflation is sustainably approaching the 2% target.
  3. The economy is not cooling as much as they had expected. He noted that if there is additional evidence of “above-trend growth,” it would warrant further rate hikes.
  4. Equally, the Fed has some concerns that the full impact of rate hikes to date is still to come through. As such, there are risks of tightening policy too little and too much, and risk management is now “critical.” This cautious approach to policy suggests that a September rate hike is unlikely.
  5. While Powell is fairly confident that policy rates are at a restrictive level, he cannot say with certainty where the neutral rate of interest (R*) is—another reason for the Fed to tread cautiously.
  6. The Fed’s inflation target will remain at 2%. It is unclear how quickly the Fed intends to reach that target, nor if it is exactly 2.0%, but Powell put to rest any talk that the Fed’s long-run inflation target had increased.

The overall message from Powell’s speech today is one of data dependency. The Fed may raise again, or they may not; it all depends on how the economy is doing. The threat of another hike is still alive—so market participants can go back to debating the ins and outs of a September hike vs. a November hike vs. no hike at all.

Our expectation is that Fed policy rates have now peaked. There is enough ambiguity about the recent strength of jobs, wage, and inflation data to keep the Fed on hold in September, and by November, the economy should be showing clearer signs of softening.

Of course, the Fed will need to remain alert to inflation pressures—as long as economic growth is strong, a resurgence in inflation is a risk. As such, the first Fed rate cut will likely only come in late 2Q 2024, once job losses have risen and growth has clearly slowed. By next summer, we will be able to determine if Fed Chair Powell could "navigate by the stars under cloudy skies."*

Grand Teton National Park night sky

* In acknowledging that the risks facing the Fed were two-sided and emphasizing the somewhat challenging nature of relying on data-dependence on a lag, Powell noted, "As is often the case, we are navigating by the stars under cloudy skies." Hopefully, the economic skies can be as clear as those in Wyoming's Grand Teton National Park.

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