Executive Summary:
Fed Chair Powell’s eagerly awaited speech at the Fed’s Jackson Hole Symposium on Friday fanned stock investors’ hope that the FOMC would lower the federal funds rate in September—despite Powell’s hedges and the fact that upcoming data releases will figure into the decision. Notably absent in his speech was mention of the Fed’s need to maintain financial system stability if it is to achieve either goal of its dual mandate. Easing in September could test that stability, test the Fed’s commitment to its 2.0% inflation target, and test the Bond Vigilantes’ patience. But it would be good for the stock market. We’re maintaining our targets for the S&P 500 price index of 6600 by year-end 2025 and 7700 by year-end 2026.
The Fed I: Markets Hear Powell Cooing
We expected Fed Chair Jerome Powell to sound neither dovish nor hawkish when he spoke at the Fed’s Jackson Hole Symposium on Friday. We expected him to be owlish, expressing the need to wait and watch for further data before committing to another round of monetary policy easing. The financial markets expected that he would be dovish, and they were right, sort of. Investors have believed that a Fed rate cut is likely in September ever since the weaker-than-expected July employment report. We’ve been pushing against this scenario. Powell did not push against it. He did not try to reset expectations. So that made the markets even more convinced that a rate cut is coming.
In previous discussions of monetary policy this year, Powell repeatedly said that the Fed is in no hurry to lower interest rates. He didn’t say that on Friday. The sentence in Powell’s speech that fueled Friday’s big stock market rally was the following: “Nonetheless, with policy in restrictive territory, the baseline outlook...
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