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No Pain, No Gain

Investment Insights: Market Update
HIGHLIGHTS:
  • Stocks tumbled after Fed Chair Jerome Powell's comments that there will be some "pain" in store for the US economy.
  • The Fed declared it will not take a break on rate hikes and will continue to fight inflation.
  • Policymakers may be aiming for a period of low growth and rising unemployment to combat higher consumer prices.
  • Investors are still seeking clarity on when exactly the Fed will loosen its stranglehold on the economy.

After a sturdy climb upward for stocks in the first part of the month, disappointing economic data weighed on investors in the second part of August, with shares declining and erasing gains from the last few weeks. Those losses accelerated on Friday, following comments from Fed Chair Jerome Powell at Jackson Hole. At the annual policy forum, Powell declared that the central bank would not be taking a break on rates and would continue to be aggressive in getting inflation under control. His speech also noted that there will likely be some "pain" in store for the US economy as an unfortunate cost of reducing inflation. Stock markets reacted, to say the least. The S&P 500 tumbled 3.4 percent for the day, with technology and consumer-focused sectors falling the most. Treasury rates also fluctuated after the comments, jumping higher in response to the new interest rate expectations. Recent trading sessions have not been much better.

A soft landing—the idealistic scenario where the Fed reins in inflation and the US avoids recession—may be increasingly less likely. Now, policymakers are targeting a "growth recession" instead, which is a fairly nuanced difference. Unlike a soft landing, a growth recession would involve an extended period of low growth and rising unemployment but does not fall into the category of a full-fledged economic contraction. Simply put, the Fed is trying to create some economic discomfort in the short term so it can curb consumer prices. These expectations have become evident within market forecasts. Fed funds futures show that investors are now betting the Fed's key rate will reach around 3.75 percent by the end of this year. More strikingly, bets that policymakers would begin cutting rates early next year have reversed, reflecting predictions for overnight borrowing to remain just under 4 percent for most of 2023.

Normalizing inflation is clearly the top priority for the Federal Reserve, particularly as longer periods of rising consumer prices can be much more harmful to an economy than a short-lived recession. The pain will be worth it—at least according to the Fed. However, now investors are likely asking: Just how long is this pain going to last? The Fed's preferred measure of inflation, Personal Consumption Expenditures, showed consumer prices rose by 6.3 percent in July—that's about three times higher than the central bank's 2 percent target. When exactly will the Fed loosen its stranglehold on the economy, or what measure will show that it's made progress toward lowering inflation? That's the answer financial markets need right now.

Market Dashboard

Financial market data for various time periods covering global asset classes.  Data as of August 30, 2022.

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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
, CFA
Chief Investment Adviser