The central event of the outgoing week in the Western markets was the banking conference in Jackson Hole, where representatives of the US Federal Reserve spoke on Friday. Investors anxiously awaited the speech of the head of the American regulator, Jerome Powell, from whom they expected to receive guidance on the Fed’s further actions to combat inflation. As usual, the focus is on expectations for the rate, which this year the regulator has already raised 4 times (the last time at the end of July – by 0.75%, up to 2.25-2.5%). In the end, Powell’s statements did not contain concrete news, but he confirmed the Fed’s resolute attitude, noting that the regulator is “ready for costs” to reduce inflation.
Investors fearing a possible US recession ended up reacting nervously. As a result of trading on Friday, the S&P 500 index lost 3.37%, Dow Jones – 3.03%, NASDAQ – 3.94%. Finam.ru collected expert opinions on what lies ahead for the American economy and markets.
“Warm Up” and Powell’s speech
Investor sentiment was mixed ahead of the Jackson Hole performance. The fact is that inflation in the United States, which had hit long-term records for several months in a row once morest the backdrop of rising food and fuel prices, finally slowed down to 8.5% per annum in July from 9.1% in the previous month (and in monthly terms and turned out to be zero). This gave hope for softening the rhetoric and plans of the American regulator.
However, the Fed representatives, who spoke before their boss Powell, immediately set a “hawkish” attitude. Thus, the head of the Federal Reserve Bank of St. Louis, James Bullard, said that high inflation will last longer than expected, and rates are still not high enough to contain it. He expressed the opinion that the rate by the end of the year should be at the level of 3.75-4%.
Kansas City Fed chief Esther George added that it is not yet clear whether the inflation slowdown seen in July will be sustainable. And Rafael Bostic of the Atlanta Fed added that a further 0.75 percentage point rate hike is possible if inflation does not improve.
Powell himself has so far tried to be cautious in his speeches and rather reassure investors. So, in 2020, at a similar conference in Jackson Hole, he assured that the Fed’s actions to stimulate the US economy would not lead to an increase in inflation, and in 2021 that inflation is a temporary phenomenon and the “test” associated with it has been passed. These claims, however, did not materialize in the end, as price increases later reached 40-year highs.
This year, the chairman of the Fed has been decisive and has spoken unequivocally in a “hawkish” tone. Thus, he confirmed that the reduction of inflation to the target level of 2% is now the main focus of the regulator’s actions, and the Fed is “ready for the costs.” Powell warned that a period of “below trend” economic growth and deteriorating labor market conditions are likely. According to him, the slowdown in the economy and high unemployment “cause less pain” than the uncontrolled rise in prices. The slowdown in inflation in July is welcome, but it is not yet certain that it will be sustainable, Powell added.
The head of the regulator did not give a signal regarding a possible Fed rate hike in September, noting that the decision would depend on economic data and forecasts by then. Powell at the same time pointed out that the Fed, as part of the fight once morest inflation, deliberately raises the monetary policy to levels that constrain economic growth. According to him, the current value of the rate of 2.25-2.5% is close to the long-term neutral level, but given the current inflation rates, “this is not the mark at which one can stop.”
A recession is likely in the US “or something worse”
Against the backdrop of the Fed’s actions, meanwhile, fears are growing that the US economy will plunge into recession in the near future. Thus, 73% of the members of the National Association of Business Economics (NABE) admit a recession in the United States in the next two years, according to a study of the association, the results of which were cited by RIA Novosti. According to the study, 73% of experts surveyed question the Fed’s ability to reduce inflation from the current 8.5% to 2% without plunging the country’s economy into recession. At the same time, 25% of economists surveyed expect a recession in the US economy in the third or fourth quarter of 2022 and almost half (48%) – in 2023.
And JPMorgan Chase CEO Jamie Dimon, quoted by Yahoo Finance, recently said he sees only a 10% chance that a slowdown in the US economy will not lead to a recession. However, he warned that the likelihood of “something worse” than just a recession is between 20 and 30%. Dimon didn’t specify exactly what he meant. As reasons for concern, he cited the Fed’s tightening policy, oil market shocks, the situation in Ukraine, and rising tensions between the US and China.
Goldman Sachs chief executive David Solomon has similarly warned of trouble ahead and urged to prepare for an approaching recession, according to a Yahoo Finance article. However, there are also more optimistic views. For example, BlackRock CEO Larry Fink, speaking on CNBC, urged investors to remain calm, calling the economic hurdles currently plaguing markets “business as usual” for long-term investors. Deutsche Bank CEO Christian Schewing puts a 50% chance of a recession, while Jason Fuhrman, a Harvard economist and White House economic adviser to Barack Obama, said a recession is less likely.
What’s next for the US market?
Financial consultant, author of the Telegram channel “Kubyshka.Finance” Evgeniy Marchenko thinksthat on Friday “something strange happened” in the US market, and does not see the logic in what happened.
“Powell didn’t say anything terrible, but investors seemed to be disappointed by such speeches and sent the markets down by 4%. And it seems that investors are afraid that the fight once morest rising inflation might lead to a recession in the US economy. on Monday, I think that we should fall, thereby unloading the technical indicators a little,” the expert assessed the results of Jackson Hole.
Loko-Invest Investment Director Dmitry Polevoy notes that market expectations for the Fed rate for the 2nd half of 2022 and 2023, following sharp initial fluctuations, remain, in fact, where they were before Powell’s comments – peak levels slightly above 3, 80% in the first half of 2023, declining to 3.50% by the end of 2023. In September, the Fed will choose between raising rates by 0.5 and 0.75 percentage points, depending on the data on the labor market next week and inflation (in a week).
Regarding the markets, Polevoy notes that they will switch to statistics next. “We don’t expect big changes from stocks in the US in the short term, although volatility will remain high. The likelihood of a slowdown in employment growth in August may preserve the chances of a 50 bp Fed rate hike in September, which markets may take positively,” Polevoy added.
Investment banker and professor at the Higher School of Economics Evgeny Kogan notes that the markets “fell down” following the speech of the head of the Fed, and believesthat there is a very high chance of “walking before November to the level of 3200-3600” on the S&P index. As a result of trading on Friday, the index stopped at 4057.66 points.
“But this movement will by no means be linear. No, friends. An easy life is not promised to anyone here. The movements will be ragged and nervous,” Kogan warned.
