What happens in Jackson Hole…

Free-fall Friday 

This month, the central bank didn’t actually hold an official policy meeting, but instead came together for the annual Jackson Hole retreat. After months several months of v aggressive policy changes to bring down inflation, the market was ready to hear the latest updates from Chairman Powell on Friday morning. Despite several data points indicating that inflation is, in fact, peaking, Powell seemed unwavering in his path to continue jamming his foot on the brakes of the economy to bring down inflation closer to the 2% range.

Moral of the story: We’ve seen reports of inflation peaking over the last few weeks, which had provided the market with some reprieve. But Powell’s testimony made it clear that fighting inflation is more important than supporting growth at this point. Unsurprisingly, markets were effectively in free-fall after Powell’s speech at 10am and I was v happy when 4pm came around and the bloodbath came to a halt for at least two days.

Watching the party end

As the Fed is continuing to hammer down inflation, one of the biggest areas they’re watching is the labor market. Demand for labor has been so far above the supply of labor, that we’ve seen the cost of labor increase meaningfully, which is then flowing into the overall inflation being experienced by the market (raise your hand if you’ve been charged a “temporary” 10% service surcharge to help pay for the staff at bars and restaurants). Economists have been watching for new weekly unemployment claims to consistently remain above 250k in order to indicate weakness in the labor market. While we’ve been seeing that for the last few weeks, new claims actually dipped back below 250k last week.

Moral of the story: While there might be some cracks appearing in the labor market, the data hasn’t shown signs of the labor market completely falling off a cliff. That being said, I think I wake up to news of hiring freezes and lay-offs literally every day, so the lights are turning on and the party has clearly ended. At this point, if the Fed keeps going at the pace it has been the last few months, it would be the equivalent of calling the cops on the party even though everyone’s already leaving.

It’s already happening 

The Fed’s favorite measure of inflation is the personal consumption expenditures price index, which showed inflation decreasing 0.1% during the month of July, coming in softer than expectations for a 0.2% increase in prices for the month. This softening in inflation follows a 1% rise in prices that we saw for June and the CPI (the other inflation indicator) showing flat prices in July. So, we’re definitely seeing indications that the tides are turning. Also in this report, income growth came in at 0.2% and consumer spending increased 0.1% – both also softer than expectations.

Moral of the story: Despite this promising report, the Fed is not confident that inflation is moving down. They’ve pointed to history where easing up on the brakes too soon has been an ineffective way of getting inflation under control. We’ll see how far they push, but it feels a bit like we’re on the Titanic and we’re headed at the iceberg at full speed and nobody can get off. Obviously, I’m feeling v optimistic.

Sign up for the weekly digest