Powell’s Speech Wasn’t Groundbreaking

Welp, as promised, we kept an eye on the Kansas City Fed’s annual conference at Jackson Hole, and we are frankly disappointed: We have not yet seen anyone in full western wear. Bank of Canada Governor Tiff Macklem gets some casual style points for choosing khakis and a relaxed sport coat Friday, but Fed head Jerome Powell, alas, delivered Friday morning’s keynote in a full suit and tie. Yet we seem to be isolated in our disappointment, because the rest of the Internet is whooping it up over Powell allegedly sending his strongest signal yet that rate cuts are coming in September. We don’t get all the fuss, though, considering his statements after July’s Fed meeting seem stronger on that front. In our view, investors learned nothing new Friday, making this another reminder to tune down monetary policy chatter.

Powell’s speech Friday was a fairly predictable run-through of the US economy’s recent history—his view of inflation’s rise, the Fed’s perceived lateness in taking it on, and the journey back to average inflation rates. Perhaps inspired by the setting and the long journeys many global policymakers undertook to get there, it was full of travel metaphors only a central bank chief could get away with. “The good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board” was a particular favorite, referencing that the Fed was hardly alone in its initial belief inflation’s rise would be short.^[i]

But times being what they are, the Shirley Temple reference isn’t what got the most attention Friday. That honor went to these two sentences, which followed his observation that upside inflation risks are “diminished” while downside employment risks have “increased”: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”^[ii]

And boom, there you have it, an alleged commitment to September rate cuts! Except not at all, because he left the timing, magnitude and pace data-dependent. Same old squishy Fedspeak!

His comments after July’s Fed meeting were arguably firmer, which makes us further question Friday’s to-do. Back then, in response to New York Times Fed correspondent Jeanna Smialek’s direct question about whether markets’ expectation for a September rate cut was reasonable, Powell said the decision would be data-dependent, as always, but that if “the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market, if that test is met, then a reduction in our policy rate could be on the table as soon as the next meeting in September.”^[iii]

Did the Jackson Hole speech amount to a full-throated confirmation those criteria are now met? Not as we read it. It referred to the same economic trends and observations he cited in July: solid economic growth, easing wage growth, slowing inflation and slower job growth. Which makes sense, because we haven’t had many data releases in the intervening 23 days, and those that did come out didn’t deviate from long-running trends. So to us, it seems like Powell mostly repeated his views from July, just with some different phrasing and those fun metaphors. And people leapt on it because this is Jackson Hole, and leaping on Jackson Hole is what people in the financial and economic analysis world do.

We fail to see the point. The US economy is growing fine at current interest rates. The stock market, close to breakeven from the sharp pullback that started mid-July, has had an impressive bull-market run for nearly two years. Rates aren’t even terribly high when you consider the full history—they are just high versus the bizarrely low rates of the past 15 years. Recency bias makes society think all this stuff is monumental. But with a longer view, we are basically at normal.

Then, too, what is the point of trying to pinpoint the precise timing and magnitude of a rate cut? Trading on it seems foolhardy. Markets have no preset reaction to Fed moves. They pre-price widely held expectations and then mostly do their own thing. Short-term moves are often a function of traders’ opinions, which run the gamut. Maybe the market will rise if the Fed cuts in three weeks. Maybe it will go up and down and up and down. Maybe it will sink like a stone if everyone has bought the rumor and decided to sell the news. Maybe it will go sideways. Maybe any number of other events will affect traders’ decisions even more than the Fed. There is just no way to know, and it is all so short-term that it is basically meaningless in the grand scheme of things.

To us, the main takeaway here is one about investor sentiment. People are waiting with bated breath for an action the Fed typically undertakes when economic conditions are worsening. There is a long history of rate hike cycles starting in bad times, not good. We aren’t bearish, and the totality of the evidence—both coincident and forward-looking—points to good times for the US economy. But a mid-cycle rate cut that the Fed undertakes because it can, not a cut policymakers think they have to make, is the exception. Not the rule. So we can see a case for a rate cut adding to complacency in the marketplace.

This is one of many factors we are weighing presently. Understanding the state of sentiment is always challenging, but it is critical to formulating any market forecast or outlook.