If You Did Not Hear This Coming, You Had Better Get Your Ears Checked

The Federal Reserve Was Right

On August 25, 2022, participants from 34 countries assembled in Jackson Hole Wyoming for the annual economic policy symposium hosted each year by the Federal Reserve Bank of Kansas City. For the last 45 years, this economic symposium includes central bankers, policymakers, academics, and economists from around the world. Chairman Jerome Powell presented the keynote speech in which he said,

“At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”.

The chairman conveyed this same message exactly one year earlier at the prior Jackson Hole Economic Symposium. In fact, the chairman repeated this message on multiple occasions underscoring the Federal Reserve’s resolve to “do whatever it takes” to reduce inflation that had spiraled to a 40-year high.

That being said, market participants continued to ignore his message not believing the resolve of the Federal Reserve. The expectation was that the Federal Reserve would not make good on its commitment to continue one of the most aggressive monetary policies in recent history. They also assumed that the Federal Reserve would taper its aggressiveness in two ways; how high the Federal Reserve would take its benchmark interest rates and the length of time that those interest rates would remain elevated.

The Federal Reserve announced its economic projections in December, vis-à-vis the “dot plot”. They revealed that interest rates were still short of their target of 5.1% and that they would maintain that elevated rate throughout 2023, to bring inflation down to their target of 2%. Clearly, the Federal Reserve expressed its intent that it would result in pain and announced that it intended to accomplish that without crashing the economy.

Economists had predicted that the US employment growth would accelerate by approximately 180,000 new jobs being added in December, the actual numbers were that an additional 517,000 new positions were added well above expectations. The strong numbers revealed today confirmed that the Federal Reserve was correct in its resolve to fight inflation and that the US economy is strong enough to withstand the Federal Reserve’s elevated rates.

Gold Today

As of 3:56 PM EST gold futures are currently fixed at $1878.40 down $52.60. Over the last two trading days, gold has lost $89.00 so those that were hard at hearing in regards to the Fed’s forward guidance should now have gotten the message loud and clear.

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Wishing you as always good trading,

Gary S. Wagner