Every year, the world's leading central bankers meet in Jackson Hole at the foot of the Rocky Mountains. At the conference they send the monetary policy signals for the near future. Accordingly, the economic experts and stock market professionals are looking forward to Jackson Hole. Fed President Jerome Powell in particular is in the spotlight.
Easing monetary policy would be premature
In his opening speech, the top US monetary authority spoke out against the premature easing of monetary policy that many investors had hoped for. Powell believes further interest rate hikes are likely and prepared the financial markets for a long fight against escalating inflation. Restoring price stability will require restrictive monetary policy for "some time," he said. To do this, the tools would have to be used "powerfully".
How high the next interest rate step will be, remained open for the time being. According to Powell, this depends on the data situation, which should mean in particular the inflation and labor market data. However, another "extraordinarily large" rate hike could become necessary.
Disadvantages for households and companies
Powell acknowledged that as monetary tightening continues, households and businesses could suffer because higher interest rates could slow the economy and lead to job losses. "That's the ugly cost of curbing inflation," Powell said. At some point along the way, however, it will be appropriate to slow down.
The head of the Fed recently described key interest rates of 3.0 to 3.5 percent by the end of the year as a "moderately restrictive level" to aim for. The US Federal Reserve raised its key interest rate by 0.75 percentage points to between 2.25 and 2.50 percent at the most recent meeting in July. It was the fourth increase in the key interest rate since the end of 2021 – and the second very large rate hike (0.75 percentage points) within two months. The reason for the decisive action of the central bank is the very high inflation. The inflation rate in the US was 8.5 percent in July. The Fed is targeting a rate of 2 percent.
More concerned about inflation than recession
"The Fed continues to be more concerned about the extraordinarily high inflation settling in than it was before a recession," says economist Bastian Hepperle from Hauck Aufhäuser Lampe Privatbank. "The Fed is consciously accepting a further weakening of the US economy – as a lesser evil in relation to the alternative of permanently high inflation," agrees LBBW economist Elmar Völker. An immediate end to the tightening of monetary policy is not in sight. Where the pain threshold lies with a view to a possible recession is one of the crucial questions in the coming months.
For a few weeks now, there have been fears on the financial markets that the central bank could trigger an economic downturn with an overly aggressive course. That would be a serious setback for US President Joe Biden, who has to fear for the majority of the Democrats in the Senate in the midterm elections in the fall. After the first two quarters, the USA is already in a so-called technical recession. Economic output has shrunk for two quarters in a row.
Stock markets slide significantly
Powell's speech caused sharp price losses on the stock exchanges in the USA and Europe. The DAX fell by 2.3 percent and the Dow Jones fell by 1.6 percent. Investors threw bonds out of their portfolios in anticipation of large increases in interest rates. The yield on 10-year German government bonds rose eight basis points to a two-month high of 1.419 percent. The euro rose above parity again.
Big hike in interest rates in Europe?
The stock market slide was also fueled by speculation about a major interest rate hike in Europe. According to insiders, some currency watchdogs want to discuss a particularly strong increase at the meeting of the European Central Bank (ECB) Council in September due to deteriorating inflation prospects. To date, no one from the Governing Council of the ECB has publicly spoken out in favor of an increase of 0.75 percentage points. But the role model of the Fed and an uninterrupted surge in inflation in the euro area provide arguments for this.
Markets, meanwhile, are firmly expecting a half-point hike to 1.0 percent at the September 8 rate meeting. A further increase of 0.75 percentage points is expected by the end of the year. In July, the ECB heralded the turnaround in interest rates and raised interest rates by 0.50 percentage points for the first time in eleven years.