This piece was originally published on August 25th, 2023.

Fed Chairman, Jerome Powell, spoke in Jackson Hole today. Here are my notes on the speech with some additional commentary:

Quickly said there’s a “long way to go” to get inflation under control. (DKI:  He’s telling investors the “pivot” to lower rates isn’t coming anytime soon.)

The Fed is focused on core PCE (Personal Consumption Expenditures excluding food and energy). This is widely viewed as one of the more predictive metrics the Fed tracks.

Noted that “two months of good data are only the beginning” and said he didn’t know if improvement in the PCE will continue. He said there’s still “substantial ground to cover”. (DKI:  Higher for longer.)

Prices of goods have fallen. Housing has gone up and down and works on a long lag due to infrequent rent negotiations. Other services are seeing more price hikes.

Powell believes the “current rate is restrictive” and that “restrictive monetary policy is called for” to get inflation down. (DKI: Powell believes the current real rate of interest is above R-star which is the theoretical neutral rate; neither stimulative nor restrictive. We’re skeptical that the neutral rate is only 2% let alone the .5% many are discussing. Powell thinks current policy is restrictive. DKI thinks a 2% real interest rate is not restrictive.)

Noted continued high consumer spending and an increase in real wages. (DKI agrees and higher wages combined with continued consumer spending means more rate hikes may be on the way.)

Powell acknowledged the balancing act the Fed has to perform right now. He’s concerned that if they don’t tighten enough now, they might have to raise rates even more in the future. Of lesser concern, too much tightening now could lead to an unnecessary recession.

DKI conclusion: This speech was in line with our article yesterday where we wrote:

I expect Powell to reiterate his key messages during his speech:

• The Fed has not made any decisions on future rates and will be data-driven in its decision-making process.
• The economy is stronger than expected meaning more rate hikes are on the table.
• We’re closer to the top than the bottom for rates meaning that future rate hikes will be the 25bp variety instead of the multiple 75bp hikes we saw last year.
• “Higher for longer”.

The market was typically volatile during the speech; falling and rising depending based on what he was saying at the moment. As of this writing, market indexes are up on the day but down from when Powell started to speak. There were no major surprises in the speech, and we think he was slightly more hawkish than some people expected.

No change in our hedging position – we’ve kept all market and interest rate hedges in place.

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