What to Make of Powell’s Speech at Jackson Hole

Investors have faced many challenges this year. The latest test: After rallying over the past two months, stocks dipped this week and closed on a big down note, with many fretting about Fed Chair Jerome Powell’s keynote address at Jackson Hole, Wyoming’s big central banker symposium. Powell’s speech was just 1301 words, yet financial headlines spewed oodles of pixels trying to make sense of it all—some blaming him for Friday’s selloff. That is possible, as daily volatility can happen for any (or no apparent) reason. But looking more broadly, Powell didn’t say anything noteworthy. Most of those parsing Powell’s words make much out of very little, and we suggest investors refrain from doing the same. 

Powell’s eight-minute speech focused on inflation, the Fed’s commitment to price stability (mentioned nine times!) and a historical review of past monetary policy. As the Fed head noted, “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” and he concluded with this headline grabber: “We will keep at it until we are confident the job is done.”^[i] Unsurprisingly, central bank observers did their best English major impression reading into Powell’s words. His callback to past Fed Chairman Paul Volcker? Clearly this Fed will attack inflation with gusto. Acknowledgement that higher interest rates may hurt households and companies? Get ready for even more rate hikes. A commitment to not stopping prematurely when tackling inflation? Prepare for a long stretch of restrictive monetary policy. The upshot: Many believe the Fed is willing to whack the economy to tame prices, so brace for trouble now.

Yet from our reading, Powell didn’t share anything new. Rather, he reiterated long-discussed stances. Go back to March 2022, a week after the Fed hiked rates for the first time since 2018. At a speech for the National Association for Business Economics, Powell observed, “… inflation is much too high. We have the necessary tools, and we will use them to restore price stability.”^[ii] He sang a similar tune to Congress in June. The Jackson Hole speech conveyed more of the same, including what will influence the Fed’s decision-making. Powell noted, “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it will likely become appropriate to slow the pace of increases.”^[iii] (Boldface emphasis ours.) In our view, that is a version of saying monetary policy remains “data-dependent”—a squishy, ambiguous approach popularized by Fed officials years ago.

Despite little here being new, many experts can’t help themselves from extrapolating words into action (e.g., projecting the quantity and magnitude of rate hikes to come this year and next). Mostly we just found it perplexing that after pledging to stop issuing forward guidance in late July, Powell is now saying something that smells a lot like forward guidance. If Fed people can’t even keep their own pledges to stop hinting at what they will do, how on earth can the actual hints be worth a darn? This is the problem with treating central bankers’ words as a guide for future policy: They aren’t and never have been.

Consider the Fed’s 2% y/y target, established in 2012, for the headline Personal Consumption Expenditures Price Index (PCE). The Fed hit that target just three times in eight years despite all its forward guidance attempts. The central bank then updated its framework in 2020, instead aiming for “inflation that averages 2% over time,” though they never explicitly defined “average” and “over time.” In our view, the Fed ditched its specific target for a much squishier one. After all, it is much easier to achieve an objective when you can define it after the fact.

Now, to be clear, we aren’t knocking central bankers for missing their targets. We aren’t aware of anyone who can forecast the future accurately, reliably and consistently. Nor do we think monetary policy has a pre-set economic impact. The notion of a Fed pulling one lever here and pushing another lever there to manipulate economic growth and inflation rates has always been far-fetched. The economy is too decentralized for central bankers to be able to fine-tune it.

But this is why we think investors shouldn’t treat central bankers as all-mighty entities with special economic insight and power. In our view, the Fed is reacting to developments in real time just like the rest of us, without much ability to foresee the exact consequences of its actions. So don’t treat central bankers’ words as particularly special or indicative of what is to come—much less how the economy and markets will adjust. Like other humans, Fed officials can (and do) change their minds based on new information. Making investing decisions based on their latest, imperfect economic assessments could be a mistake—especially if things don’t play out exactly as projected today.