What does the Fed plan to do next?

Some good company results last week helped US equities before all eyes fell on Jackson Hole, Wyoming.

As well as being a popular skiing destination, Jackson Hole is becoming well known for its Economic Symposium. Leading figures from central banks, and decision-makers across the globe, come to this annual event to discuss issues relating to a particular topic, this year’s being ‘Structural Shifts in the Global Economy’.

The speech which in previous years has garnered the most attention is that of Federal Reserve Chairman, Jerome Powell. His speech is generally seen as a good indicator of the Fed’s thinking, and helps give an idea of the direction it’s likely to take in the coming months.

Of course, the past year has been dominated by interest rate rises across the western world, as bankers have attempted to reduce inflation. Recently, US inflation has been falling closer to its 2% target, and the Fed has paused its rate hiking. That said, inflation remains elevated.

With so much uncertainty over how high interest rates are destined to go, Powell’s speech on Friday received even more attention than usual.

Whereas last year his speech was unambiguous that rates were destined to go up (as they have done), this year the talk was a little more nuanced. Powell admitted the Fed was ‘navigating by the stars under cloudy skies.’ Overall, a key message was that the Fed is still prepared to raise the interest rate or keep it at a high level, so long as the economic situation requires it.

“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” he noted.

As this speech was delivered on Friday, it’s likely we’ll see any market reactions this week.

Outside the Symposium, last week we learnt mixed information about the health of the US economy. Technology stocks had a good week, buoyed by several positive earnings results. This included from key chip manufacturer NVIDIA, which has seen its shares balloon this year on the back of developments driven by artificial intelligence.

The Nasdaq Stock Market, synonymous with the US technology sector, rose by 2.3% while the S&P 500 added a more modest 0.8%.

On a less positive note, the preliminary August Purchasing Managers’ Index (PMI) highlighted that challenges remain for the wider economy. PMIs use surveys from companies to create reports and are often used by economists to help gauge the health of an economy.

The August PMI for manufacturing in the US and UK were both low. Felipe Villarroel, Partner at TwentyFour Asset Management, noted: “The PMI data is a reminder that the hiking cycle only started 18 months ago and there are lags that are yet to be felt in the real economy.”

In Europe, equities benefitted from a decline in natural gas prices on the Continent, with the MSCI Europe ex UK Index concluding the week 0.8% higher. The FTSE 100 also climbed 1.1%, the first weekly advance in four weeks.

Outside the western world, South Africa hosted the 15th BRICS (Brazil, Russia, India, China, and South Africa) Summit in Johannesburg last week. The meeting wasn’t without its controversies. Russian President Putin was unable to attend due to facing an International Criminal Court arrest warrant for war crimes.

Nonetheless, the meeting was used in an attempt to create a counterweight to the current US hegemony. As part of this mission, the bloc invited six new countries - Argentina, Egypt, Iran, Ethiopia, Saudi Arabia, and the United Arab Emirates – to join in January.

#WeekWatch #Inflation #Interestrates