Last summer, Jerome Powell ended his Jackson Hole speech with an intimidating tone. This tone was almost gone at this year’s symposium. He pivoted his policy inclinations from, “We will keep at it until the job is done” to a more calming promise that, “The time has come for policy to adjust.” This revision is just what the markets wanted. As consumer prices are no longer rising at breakneck speed, the Federal Reserve (Fed) can move on to the other part of its dual mandate for full employment.
What we learned from Jackson Hole is the Fed is interested in preparing markets for the committee to start cutting rates at the September 18 meeting and to start a measured process of cutting throughout the rest of this year and into next.
If you have ever been to a county fair, you have probably encountered the large mason jar of candies set on the counter with an issued challenge to guess the number of candies. After a bit, those mathematically inclined could get close to the actual number. Now, what if the candies were poured into a multi-curved vase — with a hidden Rubik’s cube inside? The previous models would not be as accurate since the curves add another level of complexity. The pandemic shock is the multi-curved vase, and those at the Bureau of Labor Statistics (BLS) may need to dial-in their models. That said, the economy is likely reverting to pre-pandemic trends as corresponding data suggest businesses added roughly 174,000 jobs per month on average to their payrolls instead of the initial estimate of 242,000.
Revisions occur because additional surveys come in and labor analysts cross-check their estimates with other corresponding metrics. The final benchmark revisions will be published in February next year. But for now, the key takeaway is the labor market appears weaker than originally reported. And a deteriorating labor market will allow the Fed to highlight both sides of the dual mandate. If future monthly payroll reports come in weak, investors should prepare for multiple cuts this year. The large revisions suggest that 2023 was returning to what the labor market looked like before the pandemic. Industries with the largest negative revisions were the professional services and hospitality sectors. In contrast, transportation and warehousing industries are expected to be revised higher.
Central bankers from around the globe meet annually in Jackson Hole, Wyoming to discuss the global economy. The event gets a lot of media hype, and for good reason, since the event is often used to introduce new policy ideas.
Here is a brief review from years past:
- 2010: Ben Bernanke popularized a version of quantitative easing (QE).
- 2014: Mario Draghi prepared markets to receive a European version of QE.
- 2016: Janet Yellen used her speech to make the case for rate hikes later that year.
- 2018: Jerome Powell talked about “Guided by the Stars” – a nod toward the concept of r*, the neutral real rate of interest.
- 2020: Powell introduces the amended strategy: “averages 2% over time.”
- 2022: Powell warned of “some pain” with rate hikes.
- 2023: Powell threatened, “We will keep at it until the job is done.”
This year, Powell specifically highlighted the labor market 27 times in his speech Friday, indicating the current focus for the Federal Open Market Committee (FOMC). He surprisingly talked about the “transitory hypothesis” and tacitly defended the argument for that view.
One of the underappreciated concepts in Powell’s speech is the current data shows an evolving macro landscape. The jury is still out on whether the Fed can successfully manage the risks to both sides of their dual mandate. However, Chairman Powell could not be clearer — “the time has come for policy to adjust” and yields on the 2-year Treasury anticipate the cuts as highlighted in the “Fed Positioning Toward a Series of Cuts” chart. Given the Fed’s attention to protecting and preserving the labor market, a soft landing looks achievable, barring any shocks.
Interest rates will likely fall from here, so consider your bond allocations. Volatility should remain elevated in the coming months as the market waits for more information on the economy, elections, and a better seasonal setup. The stickiness of services inflation continues to be one of the variables that could lead to volatility.
The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
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