What Do Fed Chairman Jerome Powell’s Latest Comments Mean For Investors?

Key Takeaways

• Jerome Powell has given his speech at the Fed’s annual conference in Jackson Hole, Wyoming
• He’s stated that they remain committed to bringing inflation down to 2%, meaning that more rate hikes could be on the way
• Markets were surprisingly positive on the comments, with the S&P 500, Dow and Nasdaq Composite all gaining strongly on Friday

Fed chairman Jerome Powell (also known as Jay), has probably never had so many people so interested in his every word. Sure, as the head of the Federal Reserve, Wall Street is always trying to glean clues from his speeches and comments, but the past couple of years has seen a bigger focus on interest than we’ve seen in decades.

Simply put, it’s because the scale of the problem of inflation has been higher than we’ve seen in decades.

And while the country has made big inroads into that particular problem, Jay Powell has made it clear that the Fed believes the fight is not yet won. Last week the Fed met at their annual conference in Jackson Hole, and as usual there has been a huge amount of attention placed on the words of the chairman.

So what did he have to say, and what does it potentially mean for investors? We’ll cover that right now.

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What did Jay Powell have to say?

While the Fed have managed to help get inflation back down to around 3% from the highs of 9.1% last June, Jay Powell made it clear that we’re not out of the woods yet.

“Although inflation has moved down from its peak—a welcome development—it remains too high.” he said in his speech on Friday.

While Wall Street is waiting in anticipation of a reversal of the current tightening rate cycle, it’s clear that it’s still a little way off.

As well as remaining cautious in his comments around the current level of inflation, he also said that they were ready to act should inflation start to creep back upwards.

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell stated.

He also took a more hawkish tone when it came to the Fed’s overall inflation target. Throughout the recent period, the vast majority of comments have come with a pledge to bring inflation ‘back within target range,’ which is widely understood to be between 2 and 3%.

Now, Powell is being far less ambiguous with their target, saying that, “Two percent is and will remain our inflation target.”

That means there’s still some more work to be done on inflation, which means we could well see rates drift even higher before the Fed would consider beginning to bring them back down again.

It wasn’t just the US central bank taking this viewpoint. President of the European Central Bank Christine Lagarde was in attendance at the symposium in Jackson Hole, and made similar comments on its own objective of 2% inflation.

She stated that the ECB plans to maintain rates “at sufficiently restrictive levels for as long as necessary” to achieve this target. According to Eurostat, Eurozone inflation hit 5.3% in July, suggesting they have more work to do than their US counterparts.

How the market reacted

So while the comments were cautious and appeared to warn of further rate hikes on the horizon, Wall Street didn’t quite take it that way. Stocks gained on Friday, with the S&P 500 finishing the session up around 0.60%, the Dow gaining 0.7% and the Nasdaq Composite closing up around 1%.

It wasn’t just the comments from Powell driving the markets. In the midst of earnings season there were some big results, most notably buy now, pay later company Affirm whose big beat saw its stock price jump almost 30%.

What do Jay Powell’s comments mean for investors?

Despite the market moves on Friday, the message investors should be hearing is that it’s not over yet. So far, companies have managed to weather the impact of rising rates surprisingly well, with consumer demand remaining steady despite rising prices and rising rates.

Combined with an efficiency drive across most sectors of the market, recent earnings calls have been fairly robust. However, a common theme has also been weak forward guidance, with many companies seeing their stock fall on positive earnings results due to a soft outlook for the rest of the year.

That could be a recipe for concern for investors. If the Fed does in fact hike rates again, companies may have fewer levels to pull to keep their profit margins healthy. That’s likely to be particularly concerning if consumer spending starts to dip too.

The bottom line

While the market has reacted positively to Jay Powell’s comments on the strength of the US economy, investors are right to be wary of the overall sentiment in his speech in Jackson Hole. He’s made it clear the Fed wants to see a significant further reduction to inflation before it even considers cutting rates, and that could still be some way off.

That’s not to say a crash is inevitable. So far the Fed appears to be achieving what they set out to do, bringing down inflation without totally crashing the economy. The so-called ‘soft landing’ is underway and looking good, but the plane isn’t on the runway just yet.

For investors it means the need to maintain vigilance, to ensure portfolios are positioned for volatility while also able to capture any gains that come.

A recession is by no means guaranteed, but with more potential rate rises on the horizon it may happen eventually. When looking at how best to structure a portfolio during times like these, it makes sense to allocate a certain amount of assets to investments that perform well during recessions.

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