A Jackson Hole Fall

By Connor Smith  |  Friday, August 26

Not Fighting the Fed. Stocks sank today after Federal Reserve Chairman Jerome Powell's highly anticipated Jackson Hole Symposium speech left few doubts about how far the central bank will go to clamp down on inflation.

The Dow Jones Industrial Average sank 3%, or 1,008 points, for its largest point and percentage decline since May 18. All 30 Dow components declined. The S&P 500 fell 3.4%, while the tech-heavy Nasdaq Composite dropped 3.9%.

Though stocks rose Thursday in anticipation of Powell's speech, such gains were quickly erased this morning. Barron's Megan Cassella writes that Powell warned that failing to act forcefully to fight inflation would be more painful than remaining cautious. Megan writes:

Powell emphasized a need to rein in inflation expectations because of the way they influence consumer behavior and can in turn fuel price pressures further. He cited former Fed Chairman Paul Volcker in saying that part of the central bank’s job in returning the economy to price stability “must be to break the grip of inflationary expectations.”

Powell, whose central bank is battling inflation at four-decade highs, acknowledged how Volcker was ultimately successful in his own fight against sky-high prices through what he called “a lengthy period of very restrictive monetary policy.” The current Fed is hoping to act strongly now in order to avoid such an outcome, Powell said.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” Powell said. “We will keep at it until we are confident the job is done.”

Powell suggested recent inflation results showing cooling prices were too small a sample size to convince the Fed that it should back off from its restrictive policy, which wasn't welcome news for traders, according to Barron's Jacob Sonenshine and Jack Denton. They write:

Entering Friday, all three major indexes had risen double digits in percentage terms from their mid-June lows for the year, and the market now hopes that the Fed will lift the funds rate by just half a percentage point in September. But the fed funds futures market is pricing in about a 61% chance of a three-quarter point hike, up from about 45%, where it sat for a few minutes just before Powell spoke this morning.

There is good news, though. The Fed may have to lift interest rates aggressively for the next few months, but it may still slow down after that period, especially if inflation can keep declining. The terminal fed funds rate, or the rate at which the Fed will stop hiking, is still less than 50% likely to go all the way up to 4%. 

You can read more Barron's coverage of Jackson Hole here.

DJIA: -3.03% to 32,283.40
S&P 500: -3.37% to 4,057.66
Nasdaq: -3.94% to 12,141.71

The Hot Stock: Electronic Arts +3.6%
The Biggest Loser: 3M -9.5%  

Best Sector: Energy -1.2%
Worst Sector: Technology -4.2%