“As is often the case, we are navigating by the stars under cloudy skies. … We will keep at it until the job is done.”[i] No, we aren’t quoting the protagonist of a summertime blockbuster film or a legendary crooner—that was the US Federal Reserve (Fed) Chair Jerome Powell waxing poetic to conclude his keynote address about inflation at the big monetary policymaker shindig in America’s Jackson Hole, Wyoming, a two-day event covered by many financial publications we follow. Unsurprisingly, we have seen many analysts dissect what Powell’s speech means for monetary policy. But in our view, Powell’s words aren’t a big revelation—nor a roadmap of the Fed’s future actions—which is worth remembering for globally minded investors.
In a speech titled “Inflation: Progress and the Path Ahead,” Powell acknowledged some improvement in prices as pandemic-related distortions eased, though he also reiterated his view that “restrictive monetary policy” is necessary to further cool inflation.[ii] In his words: “Based on this assessment, we will proceed carefully as we decide to tighten further or, instead, to hold the policy rate constant and await further data.”[iii] The Fed chair’s widely awaited words didn’t surprise many observers based on our coverage of financial headlines. As one analyst described it, Powell “hit it more down the middle, with no major future changes in future hikes a welcome sign,” a stark contrast to when he allegedly “took out the bazooka” and alluded to more restrictive monetary policy.[iv] We noticed other commentators call the Jackson Hole speech evidence of a “fully data-dependent Federal Reserve,” even though it seems to regurgitate what we have seen the Fed say for fully two years under the guise of analysis.[v]
Though we noticed many economic observers applaud the Fed’s seemingly measured approach, we have some questions. Is this an admission Fed policy wasn’t cautious before? We wondered as much going back to March 2020 when the Fed announced a barrage of measures, including a seemingly reactionary round of quantitative easing (QE) asset purchases. At the time, the Fed argued extraordinary actions were necessary to calm markets.[vi] Perhaps—although we could envisage a case in which their unexpected moves weren’t hugely beneficial for the economy. Moreover, the economic logic behind massively increasing money supply when lockdowns severely constrained said supply was never clear, in our view. But hey, kudos to Powell for his newfound caution. Overall, we haven’t seen many financial commentators question the wisdom or logic behind Powell’s speech—highlighting the non-event Jackson Hole was this year—and regularly is, in our view.
Despite the rampant coverage, we don’t think Jackson Hole speeches are as impactful for the economy or markets as popularly portrayed. According to our research, the hype picked up in the early 2010s, when former Fed Chair Ben Bernanke’s speeches hinted at new QE programmes.[vii] Former European Central Bank President Mario Draghi signalled a QE programme at 2014’s Jackson Hole gathering.[viii] Powell himself may have added to the gathering’s mystique when he introduced a new policy framework in 2020.[ix] But generally speaking, we have found the Fed chair’s keynote talk tends to reflect recent past events—which many observers already know about, in our experience.
For example, Powell’s speeches this year and last focussed on inflation.[x] We don’t think that is a surprise since high prices have been the primary economic story of the past two years based on our coverage of financial publications globally. The 2021 address, “Monetary Policy in the Time of COVID,” discussed the Fed’s goals of maintaining price stability and maximum sustainable employment amidst pandemic-driven upheaval.[xi] Interestingly, Powell then called inflation “… a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.”[xii] Two years later, Powell’s call of transitory inflation looks to be correct based on recent price trends, though the Fed and other monetary policy institutions can’t exactly claim credit in this year’s speech—not after they U-turned and launched a historically fast pace of hikes in the face of public and political pressure as consumer prices kept climbing.[xiii]
Going back to 2020, Powell introduced the aforementioned policy framework, going from a more specific inflation target of 2% y/y to a squishier “inflation that averages 2% over time.”[xiv] Many observers we follow called the news a landmark shift, though the new approach seemed mostly like window dressing to us since it wasn’t clear what the Fed’s new criteria were. Before that, in the prepandemic year of 2019, Powell highlighted the economic challenges tied to trade policy—due largely to the escalation in US – China trade tensions, which had picked up steam since 2018.[xv] Jackson Hole, in this light, looks mostly like a confirmation of what we all knew—not anything predictive, especially for stocks, in our view.
We don’t think Powell’s speech is a big deal for investors. Even if the Fed Chair laid out a detailed roadmap, our research finds monetary policy changes don’t have a preset economic impact. Would raising the federal funds target range from today’s 5.25% – 5.50% to 5.50% – 5.75% crimp businesses’ willingness to invest in new equipment or hire labour?[xvi] Our research suggests otherwise, as we have found the private-sector-driven US economy is far more complex than that, and companies factor in many other criteria (e.g., the business cycle, legislation and regulation, industry and sector trends) beyond monetary policy. We also don’t think there is any real sign keeping rates high going forward would have any noteworthy effect on markets. It is the status quo, after all, not a surprise—and surprises move stocks most, based on our studies.
Now, this doesn’t mean we think investors benefit from ignoring monetary policy. The Fed and other monetary policy institutions have made mistakes in the past, so monitoring for errors is worthwhile, in our view. But when it comes to a widely watched speech filled with vague, squishy, non-committal words, we don’t think there is anything there for investors to act on.
[i] “Inflation: Progress and the Path Ahead,” Jerome Powell, Federal Reserve, 25/8/2023.
[iv] “How Wall Street Reacted to Powell’s Speech,” Krystal Hur, CNN, 25/8/2023.
[v] “Welcome to the Age of the Fully Data-Dependent Federal Reserve,” Nate DiCamillo, Quartz, 25/8/2023.
[vi] “Federal Reserve Cuts Rates to Zero and Launches Massive $700 Billion Quantitative Easing Program,” Steve Liesman, CNBC, 15/3/2020.
[vii] “Will Bernanke Launch QE From Jackson Hole?” Jill Schlesinger, CBS MoneyWatch, 26/8/2012.
[viii] “Global Investors Look to Jackson Hole for Signs of how QE Will End,” Richard Partington, The Guardian, 20/8/2017.
[ix] “Powell Announces New Fed Approach to Inflation That Could Keep Rates Lower for Longer,” Jeff Cox, CNBC, 27/8/2020.
[x] See note i and “Monetary Policy and Price Stability,” Jerome Powell, Federal Reserve, 26/8/2022.
[xi] “Monetary Policy in the Time of COVID,” Jerome Powell, Federal Reserve, 27/8/2021.
[xiii] Source: US Federal Reserve and FactSet, as of 29/8/2023. Statement based on the change in the Federal Open Market Committee’s target federal funds rate or range from March 2022 – July 2023 and year-over-year change in US Consumer Price Index, November 2021 – July 2023. The Consumer Price Index is a government-produced measure of consumer prices across the economy. “Fed's Powell Floats Dropping "Transitory" Label for Inflation,” Staff, Reuters, 30/11/2021 (accessed via Yahoo! Finance), Federal Reserve, as of 29/8/2023.
[xiv] “New Economic Challenges and the Fed’s Monetary Policy Review,” Jerome Powell, Federal Reserve, 27/8/2020.
[xv] “Challenges for Monetary Policy,” Jerome Powell, Federal Reserve, 23/8/2019.
[xvi] Source: Federal Reserve, as of 29/8/2023.
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