Stock investors took a beating on Friday after Federal Reserve Chairman Jerome Powell warned of rocky times ahead for the U.S. economy in the fight against inflation.
“There will very likely be some softening of labor market conditions, 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. These are the unfortunate costs of reducing inflation” said Powell in prepared remarks at the Jackson Hole Wyoming Economic Symposium hosted by the Federal Reserve Bank of Kansas City. His speech was one of the shortest, under 10 minutes, on record.
In the hours following, the Dow Jones Industrial Average lost over 1,000 points or 3% putting annual losses at 11%.
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The S&P 500 lost 3.4% now down over 14% year-to-date.
While the Nasdaq Composite’s 3.9% drop puts the tech-heavy composite at a 22% deficit for 2022.
“Powell came out guns a blazing, the language was clear as can be,” said Kevin Hassett former chairman of the Council of Economic Advisors for the Trump administration. This after downplaying inflation as “transitory” through late 2021 putting the central bank behind the curve in the battle against inflation which has soared to 40-year highs.
Powell also signaled rate hikes may be longer and larger in the coming months.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time” he added. Currently, the futures market is pricing in a 50%+ chance of a 75-basis point rate hike at the September meeting. Policymakers will also meet in November and December.
“If he were to go up 75 basis points for the rest of the year that would probably get them up to their target, and he almost signaled that is what they are going to do” Hassett observed.
Separately this week, the second revision to 2Q GDP remained contracted at 0.6%, affirming a recession is underway for the U.S. economy after falling 1.6% during the first quarter.
“Lifting rates like this in a recession” can be a “humbling” task Hassett cautioned.