“History is written by the victors.”

Whether this phrase originates from George Orwell or Winston Churchill remains a matter of debate. However, what stands beyond discussion is Federal Reserve (Fed) Chairman Jerome Powell’s fair assessment of the U.S. central bank’s navigational prowess – after a few fits and starts – through the economic tempest stirred by the COVID-19 pandemic.

We view Chairman Powell’s speech at the recently concluded Jackson Hole Symposium as a pivotal moment in understanding the Fed’s thinking on the current economic landscape and the potential path forward for U.S. monetary policy. Amid a backdrop of significant economic recovery but also lingering challenges, Powell offered insights into the Fed’s strategy for balancing its dual mandate of promoting maximum employment and maintaining price stability.

The state of the economy and monetary policy

When acknowledging the progress made since the onset of the pandemic, Powell highlighted the sharp decline in inflation from its mid-2022 peak. Inflation’s subsequent downward path is a testament to the effectiveness of the Fed’s restrictive monetary policy.

Importantly, Powell also noted the current state of the labor market, which has cooled from its previously overheated condition but has done so without leading to a significant rise in unemployment – especially that caused by layoffs. This nuanced assessment suggests that the Fed views the economy as moving toward a more balanced state, with inflation nearing its 2.0% target while still exhibiting a strong labor market.

Future directions for policy adjustments

A key takeaway from Powell’s speech was the emphasis on the data-dependent nature of any future policy adjustments. This approach underscores the Fed’s commitment to responding flexibly to economic conditions, indicating that while interest rate cuts are certainly on the horizon (i.e., the path), the size and frequency (i.e., the pace) will be dictated by the data.

The chairman also cautioned that the adjustments to policy would be carefully calibrated to avoid undermining progress made toward price stability. As he has made clear in previous statements, the central bank head understands all too well the lessons learned from premature easing prior to inflation being fully tamed.

Implications for markets

We believe this speech has significant implications for financial markets. Powell’s cautiously optimistic outlook could provide reassurance to investors about the potential for a soft landing, where inflation is brought under control without precipitating a deep economic downturn.

The market’s initial response – from both an equities and credit view – seems to agree. The emphasis on data dependence, however, suggests that markets should be prepared for periods of ongoing volatility as policy adjustments respond to evolving economic developments.

Just as in 2022 and 2023 when rates markets were largely dictated by each month’s inflation release, the same can likely be expected for the remainder of 2024 and into 2025, with labor market data now being the fulcrum. Given the softer print for July employment and the recent downward revision of U.S. payrolls, the next important date on the calendar will be August payrolls, to be released Sep 6.

Conclusion

Mr. Powell’s Jackson Hole speech was a thoughtful overview of the Fed’s response to an unprecedented economic crisis and its plans for navigating the road ahead. While much remains uncertain, the Fed’s commitment to adapting its policy in response to current economic data offers a hopeful outlook for achieving sustained economic growth and stability.

Given the inherent challenges forecasters face in predicting economic indicators – especially labor statistics – market volatility is likely to remain elevated. While large price swings and greater dispersion present their own challenges, we believe these can present opportunities for active investors who can agilely navigate price fluctuations. As the economy continues to evolve, the Fed’s actions will undoubtedly remain a critical focal point for markets and policymakers alike.