The week’s main event for financial markets was Jerome Powell’s speech at the Jackson Hole Symposium.

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The Fed‘s Chair had a calibrated speech, one in line with what the Fed communicated in the past.

As such, despite market volatility increasing a bit, the speech brought nothing new regarding market levels in the end. Both the equity and currency markets ended the day close to their opening levels.

However, the lack of reaction might be attributed to the speech’s timing – late in the trading week, when everyone prepared for the weekend. Therefore, it might have some ripple effects next week, especially because it is the NFP week.

The importance of future jobs data was one of the main themes of Powell’s speech, that puts the upcoming NFP release in focus.  

The Fed expects labor softening and growth below trend

There are many takeaways from yesterday’s speech for those monitoring central banks and their actions.

First, Powell remarked that the causes of inflation are supply- and demand-driven. The Fed’s fight against inflation increased the funds rate exponentially from their lower boundary.

At the current levels, the interest expense on the US federal debt has reached 19.5% of government revenues, becoming one of the biggest government expenses.

Sure enough, it is not the Fed’s job to monitor interest expenses, but the Fed is always in touch with the Treasury. In other words, interest rates are unlikely to move much higher from the current levels, despite a somehow hawkish statement at the Jackson Hole.

Powell hinted that inflation has peaked. Hence, the price stability part of the Fed’s mandate is unlikely to dictate the next steps in monetary policy. Instead, the focus shifts to the labor market.

Second, there was chatter in the market recently that the Fed (and other major central banks) should change their inflation target. Powell (and Christine Lagarde of the ECB) dismissed such a possibility vehemently.

Finally, the remarks about the labor market put next week’s NFP data into focus. Powell said that the economy needs to grow below trend, and the labor market needs to soften as a result of the Fed’s actions.

Coupled with the hint that inflation has peaked, it means that next Friday’s NFP report might trigger a rally in the stock market and dollar weakness if the report comes on the soft side.

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