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Overnight: Markets shake as Powell warns of ‘pain’ ahead

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Overnight: Markets shake as Powell warns of ‘pain’ ahead

Key points to remember

  • Fed Chairman Jerome Powell spoke briefly this morning in Jackson Hole, Wyoming to address the issue of controlling inflation.
  • While he welcomed July’s more positive CPI numbers, he said they were nowhere near enough to suggest the job was done.
  • Chairman Powell warned of a sustained “restrictive policy” in the coming months, casting a shadow of doubt over risky markets.

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Federal Reserve Chairman Jerome Powell delivered a speech this morning at the central bank’s annual meeting in Jackson Hole, in which he warned against policy tightening “for a while.” Risky markets shuddered following his comments.

fear and dread

Jerome Powell released a brief but stark statement today that sent markets tumbling.

Speaking At the Fed’s annual meeting in Jackson Hole, Wyoming, Chairman Powell said that “the primary objective of the Federal Open Market Committee right now is to bring inflation back to our 2% target.”

To achieve this goal, Powell hinted at aggressive rate hikes over the next few months, arguing that a successful reduction in inflation would require a prolonged hawkishness in the fed funds rate. “Restoring price stability will take time and will require using our tools forcefully to rebalance supply and demand,” he said. “Reducing inflation will likely require an extended period of below-trend growth.”

This reference to a “prolonged period of below-trend growth” seems to have confirmed the worst fears of traders in risk markets. Since Powell’s comments this morning, the Nasdaq has plunged 4%, or 497 points, and the Dow Jones Industrial Average has fallen 1,008 points, or a decline of 3%. Even the S&P 500 suffered a 3.5% discount following Powell’s remarks, losing 141 points on the day.

Crypto markets also took a hit today, which is no surprise as rates are expected to rise in the near future. Similar to major stock indices, Bitcoin is down 4% to $20,727 today; ETH, however, fell 8%. The second-largest cryptocurrency by volume rallied this week as the Ethereum Foundation finalized merger planning details, but today’s comments from Powell all but wiped out those gains.

The Fed Chairman spoke as clearly as ever about the prospect of tough times ahead. “While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.”

Ensuring price stability is the primary objective of the Federal Reserve, as noted by Powell in his speech this morning. Earlier this month, the CPI print showed inflation stabilizing in July at 8.5%. Markets rallied on the news, but Powell warned his audience not to get too confident too quickly. “While the weaker inflation readings for July are certainly welcome,” the Fed Chairman said, “the single-month improvement is well below what the Committee will need to see before we are confident that inflation is falling.”

Concluding with some inferences about historical precedents for fighting inflation, Powell highlighted the dangers of abandoning effective policies too soon, which can leave vital work unfinished or even undo what has been achieved so far. . “Restoring price stability will likely require tight policy to continue for some time,” he said, indicating that a prolonged period of hawkish policy was likely on the horizon.

As the crypto enters its eighth month in a bear market, Powell’s words are far from reassuring for those hoping for bullish impulses in the near future. Although Ethereum Merge may revitalize the market in mid-September, there are few other obvious bullish catalysts to see at this time; as such, the macro climate does not seem to hold out a good outlook for risky assets like cryptocurrency in the near term.

Disclosure: At the time of writing this article, the author of this article owned BTC, ETH, and several other cryptocurrencies. This material is intended for educational and informational purposes only and does not constitute financial advice.

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