August started out as a continuation of July, with asset prices generally rising and interest rates stabilizing. That all reversed course as markets began to anticipate messaging from central bankers at the Kansas City Fed’s annual Jackson Hole Symposium. Fed Chair Jerome Powell’s speech was the most widely anticipated. Those hoping for a dovish policy pivot were disappointed, as the tone was decidedly hawkish. Markets reacted with US interest rates rising, the US dollar strengthening, and asset prices generally falling.
In the near term, it seems reasonable to expect more of the same from both the Fed and the data. How far one can, or should, extrapolate the present into the future is debatable. Despite a tightening cycle, corporate earnings have remained fairly resilient with consumer spending surprisingly strong and the US employment picture holding up.
It will be interesting to see how a loosening supply chain and the effects of tighter monetary policy impact inflation expectations going forward. As it stands now, inflation expectations continue to ease. The NY Fed’s most recent survey suggests longer term expectations are now in line with pre-Covid levels, though expectations in the near term remain elevated. All else equal, we expect the Fed to remain dedicated to fighting the psychology of inflation a bit longer than actual inflation readings may justify.