Fed Chairman Powell sent hawkish signals at the Jackson Hole annual meeting

At the highly anticipated Jackson Hole Global Central Bank Annual Conference, Fed Chair Powell delivered a brief yet powerful speech, reiterating the Fed's determination to combat inflation. He stated that the Fed's top priority is to bring the inflation rate down to the target level of 2% and will steadfastly utilize policy tools to achieve supply-demand balance, thereby reducing inflationary pressures.

Powell pointed out that although the inflation data in July has improved, it is not enough to change the Fed's policy path of continuing to raise interest rates. He emphasized that the Fed will not be swayed by one or two months of data, as the inflation situation remains severe. Although the U.S. economy has slowed from last year's high growth rates, it still shows strong underlying momentum, particularly as the labor market remains very strong, but there is a clear imbalance between supply and demand.

Regarding the future path of interest rate hikes, Powell stated that the magnitude of the rate increase in September will depend on the overall economic data and the evolving outlook at that time. He believes that, given the current inflation rate is far above 2% and the labor market is extremely tight, interest rate hikes should not stop or pause after reaching the long-term neutral interest rate level. Powell also noted that historical experience strongly warns against prematurely easing policies.

It is worth noting that Powell directly refuted the market's expectations for interest rate cuts starting in the second half of 2023. Instead, he stated that the benchmark rate may only be slightly below 4% by the end of next year. This statement echoes the views of some other Fed officials, such as Kansas City Fed President George, who suggested that rates may need to be raised above 4% and maintained at that level for some time.

Powell also emphasized the importance of managing inflation expectations. He pointed out that to avoid repeating the history of the 1980s, where efforts to curb inflation led to economic recession, it is crucial to manage inflation expectations effectively. He warned that the longer high inflation persists, the more entrenched the public's expectations of continued inflation could become, with the worst-case scenario being a vicious cycle similar to the stagflation of the 1970s.

Nevertheless, Powell also mentioned that at some point, as the stance of monetary policy tightens further, it may become appropriate to slow the pace of interest rate hikes. However, he emphasized that the Fed will remain committed to combating inflation until the job is done.

Powell's remarks had a significant impact on the financial markets. The US stock market fell sharply after the announcement, with the Dow Jones, S&P 500, and Nasdaq indices all experiencing noticeable declines. At the same time, US Treasury yields rose, the dollar index strengthened, and gold prices fell. The futures market also saw a significant increase in expectations for the Fed to raise interest rates by 75 basis points in September.