Last Friday, Federal Reserve Chairman Jerome Powell delivered a forceful keynote speech at the Jackson Hole Economic Symposium that rocked the financial markets to the core. In fact, his speech emphasized that the Fed will continue its hawkish monetary policy and will raise interest rates in the fight against rising inflation. Even though inflation fell from 9.1% to 8.5% last month, it is still at a 40-year high.
Powell dispelled confidence that the Fed would reverse its current course of sharp and simultaneous rate hikes at every Federal Open Market Committee meeting for an extended period of time.
He reaffirmed the Fed's commitment to trying to restore inflation to its 2% target.
According to the CME FedWatch tool, there is a 60.5% chance that federal funds rates will rise to 300-325 basis points at the next FOMC meeting. This will mean that the Fed will raise rates by 75 basis points over the next three meetings of the FOMC.
He also assured that the Fed would be able to effectively bring down inflation without economic cost and recession, knowing that recovering inflation to its 2% target would leave consumers and businesses feeling economic pain.
Adding that it would take a long time to restore price stability, acknowledging that future actions by the US central bank would bring discomfort to households and businesses alike.
Financial markets reacted quickly to his keynote speech, which sent US Treasury yields and the dollar up.
And there was a strong and decisive sell-off in US stocks on Friday, a direct result of his statements.
The Dow Jones Industrial Average fell 3.03%:
S&P 500 down 3.37%:
The NASDAQ Composite Index was down 4.1%:
Precious metals reacted in a similar way, with significant price declines across the board.Gold fell by 1.14%:
Silver lost 1.83%:
Platinum and palladium fell by more than 2%.
It remains an open question how effective the Fed's extremely aggressive monetary policy has been in bringing inflation down from a 40-year high to its 2% target.
What's even more important? Market participants are concerned about how deep the impact and the fall in prices in financial markets will be, as the Fed expects to raise rates to at least 3.4% by the end of this year and to 3.8% by the end of 2023. Many analysts believe that in order to effectively deal with this extremely high level of inflation, interest rates should be at least 4%.
Finally, his keynote speech made it clear that bringing inflation to the 2% target would be a multi-year goal, meaning that it was unlikely that the Fed would hit its targets without triggering such a sharp economic downturn that a deep recession would become inevitable.