Federal Reserve Chair Jerome Powell shared his views this week about the prospects and possible headwinds for the U.S. economy, which continues to grapple with record-high inflation and a potential recession.
The head of the U.S. central bank does not know what the next few months can bring for the U.S. economy as uncertainty grows amid a very challenging macro environment.
“It’s very hard to say with any confidence in normal times … what the economy’s going to be doing in six or 12 months,” Powell said after the Fed’s last policy meeting late last month.
“These are not normal times.”
Powell is set to give a speech this Friday at the annual Jackson Hole Symposium, one of the longest-standing central banking conferences in the world. The conference includes several presentations on new research but also presents an opportunity for Powell and other officials to speak about monetary policy and the Fed’s plans.
Powell and the Fed are expected to maintain their aggressive approach to battling inflation, which continues to hover around 4-decade-high levels fueled by higher energy prices, supply chain constraints, and the coronavirus pandemic. The most recent consumer price index (CPI) print showed that inflation eased to 8.5% in July, from 9.1% in June.
Principal Global Investors strategist Seema Shah believes we are likely to see a pushback from the Fed to the speculations that the central bank is done with its aggressive interest rate hikes. Instead, Shah believes Powell is likely to highlight that “growth is slowing, is likely to slow further, yet inflation will be sticky and their priority is to contain inflation … They are not about to stop in response to weaker growth.”
While many fear recession, the Fed’s regional bank presidents have recently reflected on recession risks as a way of controlling inflation and used phrases like “raise and hold” which refer to an interest rate hiking approach where rate cuts remain out of question.
But it also suggests a challenging back half of 2022, particularly for stock investors who have recently driven equity prices higher.
There is a mix of factors fueling the current red-hot inflation including volatile energy and food prices which worsened following Russia’s invasion of Ukraine, and what the Fed describes as “revenge spending” – which refers to increased spending by U.S. consumers to make up for the time they were forced to spend at home during the Covid-19 pandemic.
“We remain in the midst of an extraordinarily complicated pandemic-related economic shutdown and restart,” said Bob Miller, head of America’s fundamental fixed income at BlackRock.
While Powell’s Friday speech is targeting the U.S. audience, his remarks will be closely followed all around the world. The federal funds rate has been raised from almost 0 in March to the current range of 2.25% to 2.50% in just months, with more rate hikes expected to come.
But it’s also important to note that rate hikes tackle only one aspect of inclination – the one related to business and consumer spending. Elevated interest rates make loans for houses and cars more expensive, discouraging consumers from buying those. This means there will be a weaker demand for such assets, suggesting less pressure on prices.
Costlier loans and fading demand also affect what companies are willing to spend, which could impact stock prices given that equities are usually most appealing when interest rates are low.
One of the main issues the U.S. economy faces is whether rate hikes that are already implemented will make an impact big enough to ease inflation, which currently stands at a significantly higher level than the Fed’s desired 2% target.
Summary
Fed Chair Jerome Powell is due to give a much-anticipated speech at the Jackson Hole event later this week. His tone and comments on Fed’s actions going forward are very likely to have a big impact on the markets and investor positioning.
