Insight | August 29, 2023
Muzinich Weekly Market Comment - 29th August 2023
Weekly Update: Powell Pushes Back...Again
With no Federal Reserve (Fed) or European Central Bank (ECB) meetings in August, the market has been anticipating Fed Chairman Jerome Powell’s speech at the Jackson Hole Economic Symposium that took place at the end of last week. Here we look at Powell’s remarks in 2022 and compare them to last week’s comments after a year of monetary policy tightening.
Powell’s 2022 speech was memorably short and to the point. In his own words, his remarks were “shorter … narrower” and the “the message more direct1.” He conveyed three key points:
- The Fed’s responsibility “to deliver price stability is unconditional” and that they are “committed to doing that job.”
- It is key that longer-term inflation expectations remain anchored and thus the Fed must act forcefully and with resolve.
- The “costs of bringing down inflation are likely to increase with delay,” underscoring the need to move swiftly on monetary policy.
While brief, the remarks in 2022 were intended to send a directional message to the market concisely and without ambiguity.
This year, Powell’s remarks were longer, but said little not already on our radar. Powell argued for keeping all options open given the high level of uncertainty and the ground already covered; in our view, it appears Powell strategically avoided directional signals. If we were to draw three key takeaways from last week’s speech, they would be:
Upside risks to inflation remain despite the recent progress. While reiterating that the risks of doing too much or too little in terms of monetary policy appear more balanced, the Fed is “prepared to raise rates further if appropriate.”
Any lag effects of monetary policy continue to be important and unknown. There “may be significant further drag in the pipeline2” from tightening already delivered, highlighting the downside risk to growth, and underscoring uncertainty around future policy.
There is no change to the Fed’s inflation target. In Powell’s words, “two percent is and will remain our inflation target.” Arguably, this was the only definitive takeaway from the speech, quelling—for now—the recent speculation around a higher inflation target and neutral rate.
It seems that Powell sought to dispel market speculation around a higher inflation target. This has perhaps been supported by the recent drift higher in the longer-term projections of the Fed’s Dot Plot which shows estimates of what the federal funds rate, the short-term interest rate controlled by the Fed, should be. Altogether, a reiteration of “the need for agile policymaking” amidst uncertainty, with a moderately hawkish bias.
This week we saw the US 10-Treasury reach its highest yield since 2007, partly due to market speculation around a shift to a higher neutral rate (see the Chart of the Week). The market continues to second-guess the Fed’s next move, and once again, Powell pushed back— as he has done repeatedly on rate cuts.
The widespread uncertainty to which Powell alluded justifies the data-dependent approach that central banks have adopted and the removal of forward guidance. However, it also leaves the door wide open for market-moving narratives to gain momentum and popularity, with the long-end of the curve as topical.
Please note that we will pause the production of the weekly piece for the week ending 1st September 2023. We look forward to returning for the week ending 8th September 2023. We wish everyone a restful end to the summer.
Chart of the Week: US 10-year Treasury Yield
Source: Bloomberg as of 25th August 2023. For illustrative purposes only.
1.“Monetary Policy and Price Stability,” Remarks by Jerome H. Powell, Jackson Hole Wyoming, 26th August 2022
2.“Inflation: Progress and the Path Ahead,” Remarks by Jerome H. Powell, Jackson Hole Wyoming, 25th August 2023
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This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of 25th August 2023 and may change without notice. All data figures are from Bloomberg as of 25th August 2023, unless otherwise stated. 2023-08-29-11750
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