What Did We Learn From Jerome Powell's Speech at Jackson Hole?

Following Jerome Powell's speech at Jackson Hole, the S&P 500 rose 0.9%, as shown by the figure from the Financial Times below, and the Nasdaq rose 1.2% closing on an all-time high. The question then, is what did Jerome Powell say that made the markets react positively, continuing their climb to higher and higher highs.

Line chart of S&P 500 index showing Wall Street stocks turn higher after Jay Powell speech

I am sorry to disappoint, but as boring as it may sound, there were no real fireworks to report from the Jackson Hole speech. However, Powell has given us an insight into the actions the Fed is likely to take over the coming months and years, giving the market some certainty about the future.

We now know that the Fed has achieved the first of its two goals that it has set out to achieve before monetary tightening. The goal that has been achieved being average 2% inflation and the goal not yet achieved being the economy operating at full employment, though he indicated that there has been good progress in reaching full employment due to falling unemployment.  

Although the importance of Jackson Hole seems to have been over-hyped by investors, we do now know the direction the Fed will be taking once full employment has been achieved, with tapering bound to happen in the not-so-distant future. However, we still have no idea of the all-important duration or composition of tapering that the Fed will be pursuing. This is very important as it will have a major impact on how the market will react to the Fed's tapering programme. 

While the market may enjoy riding this wave of certainty and optimism for now, there is still a lot of questions the Fed has yet to answer. Will the high that the market has been riding over recent months come crashing down in a matter of minutes after a future speech? Sadly, I do not know. 

To conclude, Jackson Hole was essentially a non-event with no major news or any surprises, we were only told what we were expected to be told. However, I think investors should be wary over whether they fully believe that the Fed has inflation under control. I believe it is still likely that we will see rising demand-pull inflation as the remaining pent-up demand is used up by consumers over the coming months. If inflation rises too much and gets out of control, it will mean a sharp implementation of monetary tightening by the Fed, including large rate rises, resulting in the gradual steps that the market has taken to reach all-time highs across various indexes will come crashing down very quickly in an elevator that only goes downwards.

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