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No Dovish Pivot Coming From The Fed At Jackson Hole, Dashing Investor Optimism

By Jesse Cohen/Investing.comMarket OverviewAug 19, 2022 05:01AM ET
www.investing.com/analysis/no-dovish-pivot-coming-from-the-fed-at-jackson-hole-dashing-investor-optimism-200628716
No Dovish Pivot Coming From The Fed At Jackson Hole, Dashing Investor Optimism
By Jesse Cohen/Investing.com   |  Aug 19, 2022 05:01AM ET
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  • Fed officials gather for their annual symposium in Jackson Hole next week
  • Remain under pressure to fight inflation, without creating a market tantrum
  • I expect the Fed to push back against rising expectations of a dovish policy pivot

The U.S. Federal Reserve may send the market a hawkish message when global central bankers meet at the Jackson Hole Economic Symposium next week.

The highlight will be Fed Chair Jay Powell's speech on Thursday morning at around 9AM ET.

Fed chiefs have, in the past, used their keynote speech to signal important shifts in monetary policy or a change in their economic outlook.

In my view, Powell will signal that the U.S. central bank will continue to raise interest rates and keep them higher for longer than expected, as it fights to bring down the highest inflation in decades.

So, we could see a major U-turn in market pricing and Treasuries particularly.

U.S. stocks have rallied off their mid-June lows—with the Nasdaq Composite exiting bear-market territory last week—on hopes the Fed will become less aggressive on interest rate hikes in the months ahead.

Dow, S&P & Nasdaq Daily
Dow, S&P & Nasdaq Daily

Investors have been too quick to price in a less hawkish outlook. Here are two reasons why the Fed will not stop tightening monetary policy anytime soon.

1. Strong Labor Market

Despite fears of a recession, the U.S. labor market continues to be strong as job openings are hovering near all-time highs and the unemployment rate is standing near historical lows.

According to the St. Louis Fed's FRED database, there are nearly 10.7 million unfilled jobs as of June, that's down from a peak of around 11.9 million in March, but up from 9.8 million openings in June 2021 and roughly 6.1 million in June 2020.

Job Openings
Job Openings

Underlining the strength of the jobs market, U.S. employers have hired far more workers than expected in the last several months.

Indeed, the monthly nonfarm payrolls report has topped forecasts in six of the first seven months of 2022, with average jobs growth of roughly 471,000/month. In comparison, the historical average jobs gain was around 190,000 per month between 2015-2019.

Nonfarm Payrolls
Nonfarm Payrolls

Furthermore, at 3.5%, the unemployment rate is now back to its pre-pandemic level and tied at the lowest rate since 1969.

Unemployment Rate
Unemployment Rate

Another sign of a tight labor market is the fact that employers continued to raise wages at a strong pace last month. Average hourly earnings rose 0.5% in July after increasing 0.4% in June.

That saw the year-on-year increase surge to 5.2%, adding more fuel to a worrying inflation outlook that gives the Fed enough cushion to stay on its aggressive rate hike path.

I can already picture Powell at Jackson Hole, saying that the strong labor market implies that the economy can indeed withstand higher rates.

Inflation Still Close To 40-Year High

U.S. CPI was unchanged in July, as gasoline prices dipped. That brought down the annual rate of inflation to 8.5% versus the prior reading of 9.1% in June, which was the highest since 1981.

Consumer Price Index
Consumer Price Index

Meanwhile, core inflation—which strips out volatile energy and food prices—increased 0.3% in July and is up 5.9% over the last 12 months, according to BLS.

Core CPI
Core CPI

While the latest figures imply that inflation has peaked or is close to peaking, U.S. consumer prices remain close to levels not seen since 1982.

Despite the recent decline, the BLS said gasoline prices were 44% higher over the past 12 months, while grocery costs surged 13.1% over the last year, the largest annual increase since 1979.

Monthly Cost Changes
Monthly Cost Changes

In addition, rising housing rents and wages, which are usually only negotiated once a year, will likely result in stickier inflation remaining elevated for longer.

While July’s dip was a positive development, it is still too early to say if the trend will be sustained as U.S. inflation remains up well over historical levels.

Fed officials have made clear that they need to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases. Minutes released Wednesday from the Fed’s July 26-27 board meeting reiterated that sentiment, noting inflation remains “unacceptably high.”

Taking that into account, the U.S. central bank has all the ammunition it needs to continue raising interest rates until it sees CPI coming back down to its 2% target.

Disclosure: At the time of writing, Jesse has no position in any stocks mentioned. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

No Dovish Pivot Coming From The Fed At Jackson Hole, Dashing Investor Optimism
 

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No Dovish Pivot Coming From The Fed At Jackson Hole, Dashing Investor Optimism

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Comments (9)
Dominic Mazoch
Dominic Mazoch Aug 21, 2022 2:06PM ET
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1. Why have a meeting in Jackson Hole while Americans are suffering.2. FED meetings and FED members making speeches need to be done on weekends or during periods where markets are closed, to help prevent market manipulation.3. Is the FED exempt from having to make Environmental Impact Statements concerning rate increases. Not a tree hugger, but they should be following all laws? And a full EIS would show what the long term effects of a rate change would cause.4. There should be a way for Congress to veto a rate change be a super percentages of both houses in 30 days.
Godswill smith
Godswill smith Aug 20, 2022 12:22PM ET
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Nice write, well articulated.💯
Mohd Izhar Muslim
Mohd Izhar Muslim Aug 19, 2022 1:49PM ET
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Thanks for the article 💯
Jose Mibaresh
Jose Mibaresh Aug 19, 2022 1:36PM ET
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write the story to fit the market action. today is expiration mr market expert
Mikka Verm
Mikka Verm Aug 19, 2022 1:03PM ET
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Fed has painted itself into a corner, we won't see the Volcker sledgehammer ever again.
Wawan Irawan
Wawan Irawan Aug 19, 2022 10:38AM ET
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sip
jason xx
jason xx Aug 19, 2022 8:28AM ET
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You are dreaming Powell could have 1% if he was that worried but no he told 75 will not be common. Get a grip
Trumpster Rocks
Trumpster Rocks Aug 19, 2022 8:28AM ET
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Powell is a Pawn nothing more...he does what he is told..wake up ! Not elected but APPOINTED BY THE POWERS THAT BE!
Brad Albright
Brad Albright Aug 19, 2022 8:28AM ET
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THIS IS TRUE!!! I TOLD POWELL TO HAVE A NICE DAY, AND HE DID!
John Berry
John Berry Aug 19, 2022 5:59AM ET
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Don't miss the boat
Harold Thurmer
Harold Thurmer Aug 19, 2022 5:20AM ET
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Im shorting the Market thru $SQQQ, $DXD & $SDS at the close of Thursday trading. This run is out of steam and a FED pivot will not happen anytime soon. Tgis is a Bear rally and was a glorious one at that
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Trumpster Rocks
Trumpster Rocks Aug 19, 2022 5:20AM ET
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Or did I miss understand this part of your post? Were you actually saying the democrats are telling us all these lies to cover for the reality of an Economy in shambles?
Kris Jay
Kris Jay Aug 19, 2022 5:20AM ET
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jason xx  there is no "victory" yet, but what millenials and robinhood traders are starting to understand is age old wisdom, dont fight the fed, and fed will be raising rates and sucking liquidity from the economy with QT.  The only way to get inflation down is to *******demand, which means lower sales and lower earnings for companies come Q3 and Q4.
Brad Albright
Brad Albright Aug 19, 2022 5:20AM ET
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@Trumpster: Another know-nothing opinion wrong because of a lack of attention to detail. Month-to-month inflation in July was zero.
Henrique Donato
Henrique Donato Aug 19, 2022 5:20AM ET
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Kris Jay  and youre the only one who knows that...
JIM VETTER
JIM VETTER Aug 19, 2022 5:20AM ET
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Brad Albright but still very high and no signs of dropping significantly any time soon. especially if you buy into the Fed's arbitrary 2% goal.
 
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