Wrangling Inflation in Jackson Hole

Weekly Market Update | August 22, 2022

Highlights

The global stock market rally took a step back last week. In the United States, the S&P 500 fell 1.2% (now down 11.3% year-to-date) while the NASDAQ dropped 2.6% (now down 18.8% year-to-date). Energy, Utilities, and Consumer Staples were the top performers while Communication Services and Materials lagged. Overseas, European stocks tumbled 2.6% as concerns about energy supplies rose while Japanese stocks slid 1.4%. The 10-year U.S. Treasury yield climbed 14 basis points to 2.98% as investors weighed the prospects for additional Federal Reserve rate hikes.

The Kansas City Fed’s 2022 Jackson Hole Economic Symposium will be the event of the week. Investors will be looking for clues as to how the Fed intends to wrangle inflation moving forward. Will policymakers feel obligated to raise rates well into restrictive territory in order to keep the downward pressure on the economy in place? Or will they express a desire to be data dependent as concerns rise that the economy may tilt into a recession in 2023?

Fed Chair Powell may attempt to use the symposium to reset the market’s expectations about future rate hikes. While the Fed may indeed end up slowing the pace of rate hikes later this year, we doubt the Fed will express any desire to ease policy at this stage with inflation still running well above the Fed’s 2.0% target and unemployment remaining near historic lows.

With leading U.S. economic indicators pointing to a further slowing in the economy, we think that the Fed will need to become more data dependent heading into 2023 if policymakers are truly aiming for a soft landing.

The next Weekly Market Update will be published on September 12, 2022. We hope that both our clients and colleagues can use the remaining days of summer for a much-needed recharge.