Federal Reserve Chairman Jerome Powell urged households and businesses to factor inflation into financial decisions as it will take time and effort to return inflation to ideal levels.
Powell made the remarks in a speech during the annual economic policy conference in Jackson Hole. According to a Baron’s report, markets were “braced for a hawkish speech.”
Powell said in his speech:
“Price stability is the bedrock of the economy — without price stability, the economy does not work for anyone.”
Powell argued that a single month’s improvement is not enough to return inflation to 2%, and “restoring price stability will take some time and means using [FED] tools forcibly.”
He further reasoned that “a failure to restore price stability would mean much greater pain” and, therefore, there will be “some pain to households and businesses” in the medium term.
The price of Bitcoin dropped 2% during Powell’s speech giving up most of its gains from the U.S. pre-market trading.
Before the event, macro-economist and former investment banker Alfonso Peccatiello said in an August 24 tweet that the speech could be “a defining moment for the FED policy.”
He predicted that Powell would need “to win this credibility battle” by keeping front-end bond yields in line with terminal FED funds rates around 4%, reducing inflation expectations, or stopping yield curves from inverting further.
Peccatiello additionally stated that equities faced the biggest risk ahead of the speech. He said:
“[Equities are] the most vulnerable places to be from a risk/reward perspective ahead of the event.”
Jackson Hole might be a defining moment for the Fed policy and hence markets in 2022.
How are bond markets preparing for the event?
And what’s the most likely outcome?
A short thread.
— Alf (@MacroAlf) August 24, 2022
Baron’s also said that “the Jackson Hole symposium has often been the venue of major Fed announcements.” Still, they theorized there would be no “significant policy news” to surprise the markets this time.
The financial news outlet did theorize that “Jackson Hole could revive the market rally,” yet reaffirmed that “plenty of strategists are warning of a hawkish Powell.”
European markets appear to have had a similar read as CNBC reported that “pan-European Stoxx 600 was down 0.4% by early afternoon, having given back opening gains of around 0.5%. Basic resources gained 1.2% while travel and leisure stocks fell 1.5%.”
The crypto markets and the S&P 500 were relatively bullish in early morning action, with Bitcoin up 2% and $SPY up 0.61% in pre-market trading.
The most recent PCE inflation figures came in softer than expected, and Bitcoin reacted positively following Powell’s last comments during July’s FED meeting. Inflation numbers were the lowest annual increase since October 2021. The likelihood of a 75 bps hike was subsequently reduced to 55% for the September FOMC meeting.
The fallout from Jackson Hole
The above predictions were in line with Powell’s speech, which did not reveal any new monetary policies but reaffirmed the FED’s dedication to bringing down inflation.
Powell stated that central banks must still bear the burden of tackling inflation, yet households and businesses now need to factor current inflation levels into their decision-making.
The hawkish outline from Powell may indicate that the FED does not believe it will be capable of bringing inflation down in the medium term.
With his remarks urging households and businesses to factor inflation into financial decisions, one may wonder if this is a nod to Bitcoin. Powell has never publicly advocated for Bitcoin as an inflation hedge. However, the FED chair is now urging people to accept inflation’s existence and that it could be here for some time.
Bitcoin is an asset with unique properties pursuant to inflation. Will it see an uptick in volume as Powell admits inflation must be a factor in current financial strategies?
UPDATE: Bitcoin fell further in the minutes after the speech to lose the $21k support, marking a 4% drop from the daily high of $21.9k.
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