“Gone are the days [when] we could rely on a Powell-backed equity rally,” says Ipek Ozkardeskaya of Swissquote Bank. Stockmarkets are used to central bankers offering them goodies when the economy weakens, but last week US Federal Reserve chair Jerome Powell instead threatened to remove the punchbowl. He made clear that “inflation must come down even if it means pain for households and businesses”.
The annual “central bankers’ conclave” in Jackson Hole, Wyoming, sees the world’s most powerful monetary policymakers gather to share “the latest reading from their models, crystal balls or chicken intestines”, says Irwin Stelzer in The Sunday Times. In 2021 Powell declared at the meeting that high inflation “was likely to prove temporary”. What a difference a year makes. With US inflation at 8.5%, he will now do battle with the inflationary tiger. Markets tumbled after Powell’s speech, with the S&P 500 and Nasdaq Composite falling 3.4% and 3.9%.
Japan’s Nikkei slipped by 2.7%. US interest rates are currently between 2.25% and 2.5%. Markets now expect the Fed to raise rates to “3.8% by February 2023, up from expectations of 3.3%” at the beginning of August, says the Financial Times. Powell and other senior global central bankers pushed back strongly against market bets that they will start cutting rates next year, says Bloomberg. Instead, they “expect to raise rates and hold them at elevated levels” until inflation is back under control.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Learning from history
Powell was also at pains to dash hopes that July’s softer inflation figures would herald a Fed pivot, says Ian Shepherdson of Pantheon Macroeconomics. “A single month’s improvement falls far short of what [we] need to see before we are confident that inflation is moving down,” he said. Powell noted that “the historical record cautions strongly against prematurely loosening policy”. Powell is referring to the 1970s, say Thomas Sargent and William Silber in The Wall Street Journal. When inflation spiked to 11% in 1974 thenchair Arthur Burns reacted by hiking rates to more than 12%.
That move temporarily brought inflation under control, but the resulting recession and unemployment then prompted Burns to ease too quickly. He cut short-term rates in half, causing a second price spike that eventually saw inflation peak at 14.6% in 1980. The Fed remained on the back foot in the fight against the “great inflation” until the early 1980s.
Powell will be keen not to repeat that experience, says Russ Mould of AJ Bell. Low unemployment and few “signs of distress in the wider US economy and financial system” from hikes so far will probably embolden the Fed to “keep monetary policy tighter for longer than financial markets currently expect”.
-
-
Number of ISA millionaires tops 4,000
The number of ISA millionaires has surged to more than 4,000 - what does it take to hit the seven-figure sum?
-
NS&I August Premium Bonds draw - check from today
NS&I bond investors can check from today to see if they scooped a prize in this month’s draw. With more than £404m to be handed out in prizes, find out what you won.
-
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
-
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
-
Would a food price cap actually work?
Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
What is Warren Buffett’s net wealth?
Features Warren Buffett is one of the world’s richest people. But how did he make his money?
-
What is Rihanna's net worth?
Features Rihanna became the youngest self-made billionaire in 2022. Here’s how she made her money.
-
UK inflation slides to 8.7% - what does it mean for your money?
News Inflation has dropped below 10% for the first time in months, but with food prices at a 45-year high, is this good news and what does it mean for your money?
-
What is Bill Gates's net worth?
Features Bill Gates is one of the world’s richest people, but how did he make his money?
