March 26, 2023

key takeaways

  • Federal Reserve Chairman Jerome Powell gave a brief speech this morning in Jackson Hole, Wyoming, to address inflation.
  • While he welcomed the more positive CPI figures for July, he said they were nowhere near enough to show that the work was done.
  • Chairman Powell warned of continued “restrictive policies” in the coming months, casting a shadow over risk markets.

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Federal Reserve Chairman Jerome Powell, speaking at the central bank’s Jackson Hole annual meeting this morning, warned of policy tightening “for some time.” Risk markets shuddered after his comments.

fear and fear

Jerome Powell stunned the market today with a brief but stern statement.

Speaking At the Fed’s annual meeting in Jackson Hole, Wyoming, Chairman Powell said, “The FOMC’s priority right now is to reduce inflation to its 2 percent target.”

To achieve this goal, Powell has signaled that he will raise interest rates sharply in the coming months, arguing that success in lowering inflation will require a long-term hawkish stance on the federal funds rate. “It will take some time to restore price stability and our tools will need to be used vigorously to bring demand and supply into better balance,” he said. “Reducing inflation will likely require a sustained period of below-trend growth.”

The reference to a “sustained period of below-trend growth” appears to confirm traders’ biggest fears in risky markets. Since Powell’s comments this morning, the Nasdaq is down 4%, or 497 points, and the Dow Jones Industrial Average is down 1,008 points, or 3%. Even the S&P 500 fell 3.5% after Powell’s speech, down 141 points on the day.

The cryptocurrency market also took a hit today, and it’s no surprise when interest rates increase in the near future. Similar to major stock indices, bitcoin It is down 4% today at $20,727; however, ETH is down 8%. The second-largest cryptocurrency by volume has rallied this week as the Ethereum Foundation hammers out scheduling details for the merger, but Powell’s comments today all but wipe out those gains.

The Fed chairman has been as outspoken as ever about the prospect of tough times ahead. “While higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also cause some pain for households and businesses,” Powell said. “These are the unfortunate costs of lowering inflation, but failing to restore price stability will mean more pain.”

As Powell pointed out in his speech this morning, ensuring price stability is the Fed’s main goal. Earlier this month, CPI data showed that inflation will level off at 8.5% in July. Markets rallied on the news, but Powell warned his audience not to become overconfident too quickly. “While July’s fall in inflation data is certainly welcome,” the Fed chairman said, “the one-month improvement is nowhere near what the committee needs to see before we can be confident that inflation is falling.”

Powell concluded by drawing some extrapolations from the historical precedent for tackling inflation, emphasizing the dangers of abandoning effective policy prematurely, which could leave important work unfinished or even undo what has been done. “Returning to price stability may require a restrictive policy stance for some time,” he said, suggesting continued hawkish policy may be on the horizon.

As the cryptocurrency enters its eighth month in a bear market, Powell’s words are far from reassuring for those hoping to see a bullish impulse in the near future. While an Ethereum merger could revive the market in mid-September, there are few other clear bullish catalysts at the moment; therefore, the macro environment does not appear to be rosy for risk assets such as cryptocurrencies in the near term.

Disclosure: At the time of writing, the author of this article owns BTC, ETH, and several other cryptocurrencies. This material is for educational and informational purposes only and is not financial advice.

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