US Fed sends cautionary signal while hawkish on future rate rises

Financial markets are always looking for a reason to buy or sell. And so events or speeches must be instantly assessed. The much-anticipated speech by US Federal Reserve Board (Fed) chairman Jay Powell at the annual Jackson Hole conference on Friday was quickly judged as “hawkish”. The Fed was “prepared to raise rates further if appropriate”, he said, and “intends to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective”.

Talk of another interest rate rise and the “higher for longer” interest rate message was framed, alongside Powell’s comment that inflation remained too high, as sending out a cautionary message.

[ Where can you expect interest rates to go over the longer term? ]

And to an extent it was. Powell knows what he is doing. But two points are worth noting. The first is that with inflation still well above target and the outlook uncertain, there is no mileage for central bankers in providing any solace to borrowers. Their focus is to get inflation down and they accept that this will inflict some economic pain. And, as they want to persuade consumers and businesses that they are serious, it is in their interest to talk tough. Expectations of future inflation are, in themselves, a key factor in determining what happens and managing these is vital.

[ Jay Powell warns inflation ‘too high’ in hawkish Jackson Hole speech ]

The second is that Powell has left himself plenty of flexibility, saying that the Fed will move carefully and on the basis of available data. It is not expected to increase interest rates – already at a 22-year high of over 5 per cent – at its next meeting in September. And probably even Powell does not know whether they will do so at the subsequent meeting in October. So we would be best advised to watch the US data and see whether recent signs of a growth revival are built on. Meanwhile, in Europe, signs of economic weakness are casting some doubts over whether interest rates will rise again in September, Like the Fed, the European Central Bank would be as well to sit on its hands for the next meeting and see how events pan out.