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Into the Night: Markets Tremble as Powell Warns of “Pain” Ahead

The Fed chair rattled markets today with his hawkish commentary and left little room for short-term optimism.

Into the Night: Markets Tremble as Powell Warns of “Pain” Ahead
Photo credit: Andrew Harrer/Bloomberg

Key Takeaways

  • Federal Reserve chair Jerome Powell spoke briefly this morning in Jackson Hole, Wyo. today to address taming inflation.
  • While he welcomed July's more positive CPI numbers, he said that they were far from sufficient to suggest the job is done.
  • Powell warned of sustained "restrictive policy" in the coming months, casting a shadow of doubt over risk-on markets.

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Federal Reserve chair Jerome Powell delivered an address this morning at the central bank’s annual Jackson Hole meeting in which he warned of tightening policies “for some time.” Risk markets have shuddered in the wake of his comments.

Fear and Dread

Jerome Powell issued a brief but stark statement today that sent markets reeling.

Speaking at the Fed’s annual meeting in Jackson Hole, Wyoming, the Fed chair said that “the Federal Open Market Committee’s overarching focus right now is to bring inflation back down to our 2% goal.”

Powell set the stage for aggressive rate hikes over the coming months, arguing that successfully reducing inflation would require prolonged hawkishness in the federal funds rate. “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he said. “Reducing inflation is likely to require a sustained period of below-trend growth.”

This reference to a “sustained period of below-trend growth” appears to have confirmed traders’ worst fears in risk-on markets. Since Powell’s comments this morning, the Nasdaq plunged by 4%, or 497 points, and the Dow Jones Industrial Average dropped 1,008 points, a 3% decline. Even the S&P 500 took a 3.5% haircut after Powell’s remarks, dropping 141 points on the day.

The crypto markets also took a hit today, which is unsurprising when rates are set to rise in the near future. Similar to the major stock indices, Bitcoin is down 4% to $20,727 today; ETH, however, took an 8% tumble. The second-largest cryptocurrency by volume enjoyed a rally this week as the Ethereum Foundation finalized scheduling details for “the Merge,” but today’s comments by Powell have all but wiped out those gains.

The Fed chair spoke as starkly as ever about the prospect of rough times ahead. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.”

Ensuring price stability is the primary goal of the Federal Reserve, as Powell noted in this morning’s speech. Earlier this month, the CPI print revealed inflation to be leveling off in July at 8.5%. Markets rallied on that news, but Powell warned his audience not to become too confident too quickly. “While the lower inflation readings for July are certainly welcome,” the Fed chair said, “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

Powell stressed the dangers of abandoning effective policies too soon, which can leave vital work unfinished or even undo what had been accomplished to that point. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said, indicating a sustained period of hawkish policy was on the horizon.

As crypto enters its eighth month into a bear market, Powell’s words are far from reassuring for those hoping for bullish impulses in the near future. While the Ethereum Merge may revitalize the marketplace in mid-September, there are few other obvious bullish catalysts to be seen at the moment; as such, the macro climate does not appear to have a healthy outlook for risk assets like cryptocurrency in the short term.

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

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