Powell’s Jackson Hole Nothingburger

“As is often the case, we are navigating by the stars under cloudy skies. … We will keep at it until the job is done.”^[i] No, we aren’t quoting the protagonist of a summertime blockbuster or a legendary crooner—that was Fed Chair Jerome Powell waxing poetic to conclude his keynote address about inflation at the big Jackson Hole central banker shindig. Unsurprisingly, pundits have spewed analyses of what Powell’s speech means for monetary policy. But nothing here is a big revelation—nor a roadmap of the Fed’s future actions.

In a speech titled “Inflation: Progress and the Path Ahead,” Powell acknowledged some improvement in prices as pandemic-related distortions eased, though he also reiterated his view that “restrictive monetary policy” is necessary to further cool inflation. In his words: “Based on this assessment, we will proceed carefully as we decide to tighten further or, instead, to hold the policy rate constant and await further data.” The Fed head’s widely awaited words didn’t surprise many observers. As one analyst described it, Powell “hit it more down the middle, with no major future changes in future hikes a welcome sign,” a stark contrast to when he allegedly “took out the bazooka” with a more hawkish-than-expected tone.^[ii] Others called the Jackson Hole speech evidence of a “fully data-dependent Federal Reserve,” even though it seems to regurgitate what the Fed has been saying for fully two years under the guise of analysis.^[iii] (Actually, even longer than that, considering then-San Francisco Fed President John Williams printed t-shirts in 2015 saying as much.)^[iv]

Many applaud the Fed’s seemingly measured approach, but we have some questions. Is this an admission Fed policy wasn’t “cautious” before? We wondered as much going back to March 2020 when the Fed unloaded a barrage of measures, including a shoot-from-the-hip round of quantitative easing (QE). At the time, the Fed argued extraordinary actions were necessary to calm markets. Perhaps—although we could envision a case in which their unexpected moves worsened the panic. Moreover, the economic logic behind massively increasing money supply when lockdowns severely constrained said supply was never clear. But hey, kudos to Powell for his newfound “caution.” Overall, not many question the wisdom or logic behind Powell’s speech—highlighting the non-event Jackson Hole was this year—and regularly is.

Despite all the press, Jackson Hole speeches aren’t as game-changing as people think. The hype picked up in the early 2010s, when former Fed Chair Ben Bernanke’s speeches hinted at new QE programs. Former ECB President Mario Draghi signaled a QE program at 2014’s Jackson Hole gathering. Powell himself may have added to the gathering’s mystique when he introduced a new policy framework in 2020. But generally speaking, the Fed chair’s keynote talk tends to reflect recent past events—which everyone already knows about.

For example, Powell’s speeches this year and last focused on inflation. Is that any surprise? High prices are THE economic story of the past two years. The 2021 address, “Monetary Policy in the Time of COVID,” discussed the Fed’s plans to achieve its dual mandate amid pandemic-driven upheaval. Interestingly, Powell called inflation “… a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.”^[v] Two years later, Powell’s call of “transitory inflation” looks to be correct, though the Fed and other central banks can’t exactly claim credit in this year’s speech—not after they U-turned, called inflation “persistent” and launched a historically fast pace of hikes in the face of public and political pressure as prices kept climbing.

Going back to 2020, Powell introduced the aforementioned policy framework, going from a more specific inflation target of 2% y/y to a squishier “inflation that averages 2% over time.” Many viewed the news as a landmark shift, though the new approach seemed mostly like window dressing to us. Before that, in the simpler, prepandemic year of 2019, Powell highlighted the economic challenges tied to trade policy—due largely to the escalation in the US – China “trade war,” which had picked up steam since 2018.^[vi] Jackson Hole, in this light, looks mostly like a confirmation of what we all knew—not anything predictive, especially for stocks.

As we wrote last Monday, this isn’t a big deal for investors. Even if Powell laid out a detailed roadmap, monetary policy changes don’t have a preset economic impact. Would raising the federal funds target range from today’s 5.25% – 5.50% to 5.50% – 5.75% crimp businesses’ willingness to invest in new equipment or hire labor? We don’t think so—the US economy is far more complex than that, and companies factor in many other criteria (e.g., the business cycle, legislation and regulation, industry and sector trends) beyond monetary policy. There isn’t any real sign keeping rates high going forward would have any effect on markets. It is the status quo, after all, not a surprise—and surprises move stocks most. That was the story of early 2022’s U-turn—not the hikes themselves, which stocks’ climb amid rate hikes since October shows.

Now, this doesn’t mean investors should ignore monetary policy. The Fed has made mistakes in the past, so monitoring for errors is worthwhile. But when it comes to a widely watched speech filled with vague, squishy, non-committal words, we don’t think there is anything there for investors to act on.