In his 8-minute speech at the recent Jackson Hole symposium, US Federal Reserve Chair, Jerome Powell, fundamentally shifted the market outlook. Powell strongly suggested there will be no pivot in monetary policy, and there will be 'pain' as the Fed engineers a reduction in demand to lower inflation. The Fed's view on the recent 17% rally in equity markets (S&P500) could not be clearer.
Powell's reference to the inflationary dynamics from the 1970s and 1980s was telling. It took three Federal Reserve chairmen to get the job done - with only Paul Volcker finally delivering the silver bullet. Inflation in the 70s lasted a whole decade, rather than simply being transitory. Recognising valuable lessons from the past, Powell said, "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
The rate rise message
We've always believed that in order for Powell and the Fed to maintain their credibility, they cannot pivot - at least not at this point. At Jackson Hole, Powell's message was direct - the Fed wants to make sure that the market forgets any idea of a pivot before it becomes more comfortable with inflation.
The US 10-year bond yield is starting to again price more hawkish monetary policy, with the yield rising ~60bp to 3.20% at 5 September 2022 (and seemingly heading towards the recent peak of 3.42% seen in mid-June, when the ASX300 Accumulation Index was 7% lower than today's level). Interest rate futures markets have also become more hawkish.
