Every year central bankers from around the world gather in Jackson Hole, Wyoming to discuss topics that can impact central bank monetary policy. This is a closely watched event as it allows policy makers to speak to where they believe they are in the monetary policy cycle. Over the last few years this event has taken on even larger significance due to the move to a zero-interest rate policy (and quantitative easing) after the 2020 COVID pandemic and, more recently, monetary tightening (5% increase in the federal funds rate) and quantitative tightening.
The meeting comes at a pivotal time this year as folks are trying to determine if the Federal Reserve is done raising rates and, more importantly, when might they begin lowering rates. The following excerpts are taken from the prepared speech of the Chair of the Federal Reserve, Jerome Powell (all emphasis and formatting ours):
Good morning. At last year's Jackson Hole symposium, I delivered a brief, direct message. My remarks this year will be a bit longer, but the message is the same: It is the Fed's job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. 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.
To understand the factors that will likely drive further progress, it is useful to separately examine the three broad components of core PCE inflation—inflation for goods, for housing services, and for all other services, sometimes referred to as non-housing services.
- Core goods inflation has fallen sharply, particularly for durable goods, as both tighter monetary policy and the slow unwinding of supply and demand dislocations are bringing it down. Similar dynamics are playing out for core goods inflation overall. As they do, the effects of monetary restraint should show through more fully over time. Core goods prices fell the past two months, but on a 12-month basis, core goods inflation remains well above its pre-pandemic level. Sustained progress is needed, and restrictive monetary policy is called for to achieve that progress.
- In the highly interest-sensitive housing sector, the effects of monetary policy became apparent soon after liftoff. Mortgage rates doubled over the course of 2022, causing housing starts and sales to fall and house price growth to plummet.
- The final category, non-housing services, accounts for over half of the core PCE index and includes a broad range of services, such as health care, food services, transportation, and accommodations. Twelve-month inflation in this sector has moved sideways since liftoff. Inflation measured over the past three and six months has declined, however, which is encouraging…Production of these services is also relatively labor intensive, and the labor market remains tight. Given the size of this sector, some further progress here will be essential to restoring price stability. Over time, restrictive monetary policy will help bring aggregate supply and demand back into better balance, reducing inflationary pressures in this key sector.
But we are attentive to signs that the economy may not be cooling down as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.
As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data. Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all.
While we apologize for the length of the excerpt, it is important to grasp what the Fed is looking at and how they might react to it. Our reading of the above is that the Fed is prepared to raise rates should the economy not cool off and – importantly – rates will remain higher for longer than the market has been anticipating. That said, the speech was not overly hawkish, which, in the market, means it was dovish and is part of the reason for the controlled environment in the markets.
We are witnessing, however, a continued increase in the expectations for the federal funds rate over the next year:
Source: Bloomberg
It is our view that the change in expectations will continue until the futures reflect “higher for longer” which will not be a tailwind for risk assets.
The Fed needs to see continued improvement in inflation before they begin lowering rates. As a result, this interest rate environment should remain attractive for savers and fixed income investors. While dividend yields will continue to be attractive, investors will now have the opportunity to more broadly diversify their income sources.
The views stated in this blog (report) are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliableÍž however, their accuracy or completeness cannot be guaranteed.