Jackson Hole 2024

Fed Chair Jerome Powell announced during his annual speech at Jackson Hole that “the time has come for policy to adjust.” The Fed is expected to begin rate cuts in September after raising the federal funds rate 5.25% over the past two and a half years.

Why now? Powell argued that the balance of risks between inflation and unemployment has shifted. Inflation has cooled significantly, while the labor market has weakened. Even with the onset of rate cuts, rates are likely to remain elevated for the next year or more, given that current expectations are for rate reductions to accrue gradually. However, Powell pointed out that the Fed has the runway to trim rates more aggressively should the labor market show signs of deeper distress.

Powell also delved into an explanation of inflation’s rise and fall over the past 3 years. The pandemic and its aftermath was the primary cause—pent-up demand exploded, fueled in part by government spending that sought to boost recovery from the COVID recession.

This increased demand was particularly focused on goods rather than services, as services took longer to recover from COVID’s impact. Labor supply fell at the onset of the pandemic, and took years to recover. Supply chains struggled to adjust amidst a labor shortage and shifting demand into goods. Russia’s invasion of Ukraine also helped spark energy and commodity price spikes.

As markets cleared and labor supply recovered, inflation cooled. Powell’s belief in 2021 that inflation would prove transitory and would not necessitate a monetary response was incorrect, but much of the inflation problem was self-correcting, although the process took longer than the Fed had originally anticipated. Powell credited tighter monetary policy with curtailing demand and keeping inflation expectations in check. Essentially, the Fed kept the inflation fire contained, thereby allowing the sources of that fire to burn themselves out.

Markets and interest rates haven’t moved much in the week since Jackson Hole, most likely because the Fed’s dovish pivot has been anticipated for some time. As of this writing, markets give about a 70% chance of a 25bp rate cut in September, and a 30% chance of a 50bp rate cut. The path of rate reductions has yet to unfold, but it appears the economy has finally reached a point where inflation is no longer dominating the headlines.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.