There is no question that the country is currently in a spot of economic uncertainty. The supply chain issues that have compounded since the beginning of the pandemic more than two years ago continue to cause issues. Our gross domestic output as a nation has declined the last two quarters which has led some to believe we are in a recession. The main cause for concern for the average American comes in the form of inflation. Prices for nearly every type of good and service are increasing at rates we have not seen since 1981, which is 19 years before I was even born. This inflation of course is interconnected with the issues I previously mentioned.
The supply chain issues mean we have less supply to service the same amount of demand. This means higher prices. In turn, output lowers as consumers begin to be unwilling to pay the rising prices and producers produce less because their cost of goods sold increases. The influx of money by the federal reserve into the economy starting in spring of 2020 to jumpstart the economy via the buying back of treasuries and the lowering of interest rates also has contributed to the inflation. So now the federal reserve is tasked with doing their job and fixing the monetary problem that they helped create. They have a lot of power to do so and much of that power rests on the word of the Federal Reserve Chair, Jerome Powell.
Jerome Powell was elevated to the chair of the federal reserve in 2018 by President Trump after serving on the Reserve’s Board of Governors since 2012. He was renominated by President Biden last November to continue leading the Federal Reserve. As the Chair, Powell does not make all of the Fed’s decisions regarding monetary policy, albeit he is very influential in the discussions. Powell is however the voice of the Reserve and in turn his words hold the weight and backing of the institution itself. Because of this, Powell’s remarks regarding the Fed’s efforts to curb inflation continue to cause fluctuations in the stock market.
Powell announced the Fed’s first rate hike on March 16, 2022 of 25 basis points in what was planned to be a 10 hike process. Subsequently, markets dropped dramatically on the news as Federal reserve tightening in this manner brings fears of recession. Since these first hikes have been announced, every time Powell speaks the markets are thrown in flux. Take his recent public appearance in Wyoming. Each year the Federal Reserve holds a conference in Jackson-Hole Wyoming. I don’t blame you if you have never heard of the town, it is in the middle of nowhere. However, this conference brings together the greatest minds in the fields of economics and the study and implementation of monetary policy. Powell gave his Jackson Hole speech, in which he mentioned the Fed’s continued commitment to an aggressive monetary policy with a willingness to accept short term pain to avoid long-term problems. Powell also mentioned that we will stay at high levels until we are back to price stability.
So what happened in the markets? Shortly after Powell’s speech, actually while the speech was still occurring, the markets dropped by a significant amount varying between 3% and 3.9% for the three major indexes. Significantly to note, the markets did not react in the same way when other members of the Fed were speaking. Powell’s words hold the greatest meaning. The stock market is looking for him to clear as to what the Reserve’s intentions are. He seemed to make a clear statement that the Fed is truly committed to curbing inflation even though it might bring us some problems in the short term. Unambiguity is what the public has been looking for from him. Powell has been known in the past to not show his hand in regards to what the fed is planning to do whether for strategic reasons or because of personal uncertainty. That is not what the stock markets like. The markets wants to be given a straight answer, for better or for worse. Powell’s words hold significant short-term power on the stock markets as do the economic consequences from the Federal reserves monetary policy decisions. Let us hope that Powell and the Federal Reserve continue to be clear about their plans so that the stock market and more importantly the American people can stay informed.
Listen below to LPL Financial’s Chief Global Strategist Quincy Krosby discuss Jerome Powell’s influence and his Jackson Hole speech.