On Friday, Jerome Powell, the Chair of the Federal Reserve, gave the opening remarks at the annual Jackson Hole Economic Symposium. While previous years saw Powell using the symposium as an opportunity to discuss broad economic topics, this year’s remarks were a more direct and serious discussion of the Federal Reserve’s inflation policies and forecasts.
Powell discussed three important lessons the Federal Reserve has learned from inflation in the seventies, eighties, and more recent years:
1. Central Banks must take responsibility for lowering inflation
2. Expectations for inflation must be kept low and
3. Rates must be kept high until these goals are achieved.
The ultimate takeaway from these messages is that Federal Reserve interest rate increases can be expected with certainty, which may foreshadow further economic trouble and, subsequently, worsening company valuations.
While the market has enjoyed gains in recent months, most agree these increases have come from two primary factors. Lower inflation readings for July decreased the likelihood of more aggressive rate hikes, and fears of economic recession increased hopes of possible additional quantitative easing.
The remarks at Jackson Hole are contrary to both factors and likely to result in additional market losses. There was a 3.37% drop in the S&P 500 and a 3.03% decline in the Dow Jones Industrial Average on Friday following Powell’s address at 8 a.m. CST.
