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Markets Plummet in Response to Fed Chair’s Warning of Upcoming ‘Pain’

tl;dr Summary: Federal Reserve Chair Jerome Powell delivered a stern message at the annual Jackson Hole address on Friday, emphasizing that the Fed remains determined to tame inflation at all costs, even though this strategy may bring ‘some pain’ to the economy. US stock markets fell dramatically in response to the statement.

On Friday, Chair of the Federal Reserve Jerome Powell spoke at the annual economic symposium in Jackson Hole, Wyoming. His words were emphatic, and the stock market did not digest them well. The three major US indices (S&P 500, Nasdaq and Dow Jones) all fell by more than 3% over the day’s trading, with Bloomberg reporting that nearly $80 billion was wiped from the stock market following Powell’s comments. As usual, the crypto market followed in the footsteps of stocks, with the total crypto market cap once again falling beneath the $1 trillion mark on Friday.

The Federal Reserve (Fed) is the central bank of the USA. One of the key roles of the Fed is to maintain price stability, more specifically to keep inflation under control. The Federal Reserve set a target inflation rate of 2%, at which point it would deem prices ‘stable’. It is fair to say that prices have not seemed stable in recent months, with inflation hitting dizzying new heights of 9.1% in June. These are the highest rates seen in over 40 years, and essentially represent a 9.1% reduction in the real terms value of the dollar over a one-year period. It is no surprise given these figures that Federal Reserve members have declared getting on top of inflation their “number one priority” since the start of 2022.


In its most simple form, inflation is driven by a combination of excess demand for products and inadequate supply of products. As the Fed has limited power to increase the supply of most products, their inflation-fighting methods generally focus on decreasing buyer demand for products. One of the ways they can achieve this is to raise interest rates, and indeed since the start of 2022 the US Federal Reserve has announced a series of four consecutive interest rate hikes, totalling 2.25%.

Higher interest rates make it more expensive to borrow money and more attractive to save money, and the net result of this is decreased demand for goods and services. In turn, this leads to lower inflation, seemingly making ongoing interest rate rises the simple solution to the problem of inflation. Not quite… By various mechanisms, increases in interest rates tend to impact negatively on economic growth. Indeed almost every US recession since the Great Depression has been triggered by interest rate rises by the Federal Reserve. As such, the Fed finds itself in the tricky position of trying to tame inflation without causing a global recession.

There are some signs that the Fed’s policy is working in terms of inflation control. By certain metrics, it is starting to look like inflation may have peaked, however we are yet to see consistent data and it is clear that the Fed still remains a long way from its 2% target. Furthermore, there are significant signs of weakness on the economic growth front. Recent Q2 GDP data confirmed that the US had suffered its second consecutive quarter of negative GDP growth, thus entering what many have called a “technical recession.”

With all of this in mind, all eyes were on Jackson Hole last week, with investors looking to gauge the mood of Jerome Powell and the Federal Reserve ahead of upcoming interest rate decisions. Many were hoping that Powell would recognise the increasing signs of economic slowdown, and some had even speculated that the Fed may be forced to pivot in response to recession fears and begin to lower interest rates once more.

It is fair to say that these hopes did not last long. The Fed Chair spoke for just over eight minutes, and the event was live-streamed for the first time in history. It was clear from the outset that Mr. Powell was in a stern mood, and not planning to mince his words:

“Today, my remarks will be shorter, my focus narrower, and my message more direct.”

He outlined the problems that inflation is bringing to the US economy, recognising that it is a problem that disproportionately affects the poorest in society:

“The burdens of high inflation fall heaviest on those who are least able to bear them.”

Powell’s “more direct” tone was apparent when he admitted that the Fed’s actions would ultimately bring “some pain” to American citizens, however noted a failure to tame inflation would be significantly worse:

“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. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Powell also wasted no time in dashing any hopes of an early pivot:

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

The Fed Chair’s closing remarks hammered home his message that the Fed will not change path until inflation is well on its way back to the 2% target:

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”

After a weekend to digest Powell’s words and Friday’s losses, US stocks slid again on Monday to close firmly in the red. Bitcoin has been flirting with the key support level of $20,000 for most of the weekend, and sits at $19,970 at the time of writing.

The Fed will next meet in September, and given Powell’s tone it seems another interest hike is now a formality. The only questions that remain are how big the hike will be, and for how long the Fed can keep raising rates at this intensity without causing a full-blown recession.


  • James is a British doctor currently residing in Sydney. When he’s not at the hospital or bringing you the latest in crypto news, you’ll find him in the surf or exploring Australia’s great outdoors.

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