Fed Chairman Jerome Powell‘s highly anticipated Jackson Hole speech, although predicted in a hawkish tone, still rocked the markets. Powell’s speech, which started by saying “My message today will be short and clear” and lasted for 8 minutes, was more hawkish than expected. In fact, it was remarkable that he praised Volcker, the legendary chairman of the Fed, who had a tough fight with the highest inflation in the USA.
Before moving on to the analysis, let’s summarize what President Powell said.
POWELL’S HISTORICAL TALK
➔ “We absolutely have to reduce inflation.
➔Price stability is our primary duty as the Fed. When inflation is high, the economy cannot reach its full potential.
➔An economy without price stability does not serve anyone. High inflation affects the entire economy.
➔The longer inflation remains high, the more likely it is to ossify.
➔We welcomed the July inflation, but what we need is confidence that inflation is going down.
➔Restoring price stability will take some time and the Fed needs to use its tools vigorously.
➔The Fed must hold on to its stance until it’s done.
➔Reducing inflation will likely require a period of below-trend growth.
➔There will likely be some softening in labor market conditions.
➔While lowering inflation, higher interest rates, slower growth and a softer labor market will hurt both companies and households alike.
➔These are the unfortunate costs of reducing inflation.
➔However, the failure to restore price stability means much greater pain.
➔There will be a tighter monetary policy for a while for price stability.
➔September decision will depend on a lot of economic data to come. However, a large-scale increase may still be necessary.
➔ It will also be necessary to slow down the rate of interest increases at some stage. But history warns us against the risks of premature monetary policy easing.”
THE PROMISE OF BLOOD, TEARS AND PAIN
➔President Jerome Powell, with a message first “Inflation rise has peaked, will decline soon”, “Fed will cut interest rates when recession comes” “We have left the real challenge behind in the fight against inflation” He underlined the market theses that did not touch the ground.
➔Powell told Wall Street: “Don’t be in such a hurry to celebrate your wedding feast. Interest rates will rise further and will remain high for a long time. The consequences will be painful for both companies and households.”
➔One message of Powell’s speech was directed to the people in the street and was clear. He made it clear that the priority is to fight inflation. It was the first time he spoke of pain.
➔ Fighting inflation will not be easy or painless. But if it is not done, the price to be paid will be much higher.
➔To the people of the same British Prime Minister Winston Churchill before he plunged his country into World War II, “I promise you nothing but blood, toil, tears and sweat” like he said.
➔For the first time, it was perceived as a sincere confession that he talked about the pain that his own policy would cause. Thus, for some time, former U.S. Secretary of the Treasury and Harvard University faculty member Lawrence Summersexpressed by “Inflation does not fall without a bitter prescription” came to his thesis.
OVER THE PERIOD OF PLENTY AND CHEAP MONEY
➔Powell did not embellish his words while stating that what will happen next will be good pain medicine and will last a long time, he said it directly.
➔ “Pain” was the keyword. If this bitter medicine was not taken, what would come to the agenda was more bitter and permanent.
➔ the road entered in the war with inflation was not a rose garden. It was a very difficult, long, thorny road. An era that lasted 14 years was ending and a new era was beginning that would take another 10 years.
➔Fed chairman made a historic speech. He declared that the era of plentiful and easy money is irrevocably over. The wedding prepared the markets in the festive mood to drink bitter medicine.
It is also important whether the markets believe that interest rates will remain high for a long time. In case of the first serious recession, will there be a step back in interest rates or not? Can the Fed still keep raising rates when employment begins to slow?
➔The discourse is beautiful, but the implementation is difficult and the performance will be seen along the way.
➔The position of the markets so far is ok in the short term, but in the long term “We’ll believe you if you prove you stand by what you say” can be summarized as
➔This important speech will gain its “historical” quality if necessary.
NEEDS A NEW PRICING
➔The Fed Chairman’s statements require new pricing because he firmly established the need for long-term high interest rates. The fight against inflation will not be so happy.
➔It can be said that this pricing has started as of Friday.
➔Moreover, this pricing came despite the expectation of hawkish statements from the Fed Chairman and to some extent it was included in the prices.
➔This year-end policy rate can be increased to 3.5-3.75% or 4%. It may continue to remain slightly above 4 percent in 2023.
➔Fed’s rate hike in September, which was priced at 50 basis points before the speech, again shifted to 75 basis points.
➔After the speech, there was no decrease in market rates, there was fluctuation. There were even small increases in short-term terms.
➔ Stock markets fell hard. US stock markets suffered daily losses of 3-4 percent. Reflecting the average of world stock markets MSCI Index It ended the day down 2.6 percent.
➔Gold believed in tight monetary policy that the same day ounce It fell 1.2 percent from $1,758 to $1,737.
➔Decrease in crypto assets has exceeded twice the stock market. Bloomberg Galaxy Crypto Index‘s daily loss reached 6.47 percent.