Jackson Hole symposium without breakthrough

On Friday, the financial markets were alive with Jerome Powell's speech in Jackson Hole. There was no breakthrough. The head of the Federal Reserve reiterated that interest rates may still be raised and restrictive monetary policy will stay with us for longer. As a result, the yield on 2-year US government bonds rose to the highest level since 2006 and approached the peak before the global financial crisis. The dollar strengthened in the first reaction and indices fell, although at the end of the day EUR / USD exchange rate rose above 1,08 and Wall Street returned to gains.

Progress on inflation

A little rain from a big cloud. This is how you can describe Friday's speech by the head of the Fed at an economic symposium in the Rocky Mountains. Powell admitted that the central bank has made progress on inflation, but suggested that it remained too high, which might justify further action. Monetary policy will likely remain at a high level of restrictiveness for quite some time until policy makers are confident that inflation will fall steadily towards the 2% target. Lower readings CPI in June and July are noticed, but Powell admitted that more evidence is needed that price growth dynamics are on the right track. Therefore, subsequent macro readings will continue to electrify the market, thus causing greater volatility. At the same time, the two-sided risk was underlined: doing too little may allow inflation to stay above the target, while too many hikes may hurt the economy unnecessarily. So the Fed sent a message that further steps will be very careful and measured, which can be interpreted as less likely to raise the cost of money again.

The Fed still has a problem in estimating a neutral interest rate that neither stimulates nor weakens the economy. Another difficulty that the central bank has to deal with is the long delay in the impact of policy on the economy.

Lagarde's hawkish tone

Compared to last year's speech, Powell's comments were much more restrained. This should be seen against the backdrop of a changed economic environment. Now the datasheet looks different: inflation was 3,2 percent. in July, and the Fed raised the federal funds rate to 5,50 percent. The labor market abolished these increases surprisingly goodwith an unemployment rate of 3,5 percent. in July 2023 (same level as a year ago) and above 200. creation of new jobs in the non-agricultural sector.

Track market pricing interest rates slightly changed in the US. Nevertheless, the probability of September and November upward movement on the rates has increased. US 2-year bonds rose (their yields) to the highest level since 2006. The dollar strengthened, but in the later part of Friday's session it gave back the gains.

It should also be taken into account that the President of the ECB spoke at Jackson Hole. Christine Lagarde maintained a "hawkish tone". She noticed that the bank it will set rates as high as necessary and hold them for as long as it takes to bring inflation back to target. She stressed that it will be important for central banks to ensure price stability in an "era of uncertainty". Perhaps this factor caused the major currency pair to only level the lows at 1,0765 before rebounding above 1,08.

Source: Łukasz Zembik, OANDA TMS Brokers