Higher For Longer... not rates, but equities?

This past Friday has come and gone. The speech we had waited all summer for was rather short in delivery, and really was not very specific at all. What the Fed Chair did though, was provide clarity on one main item. One item that had already for the most part been assumed and I had thought priced into markets. The trajectory of forward-looking monetary policy has indeed, at last changed. Though there still has not been a change made to the target range for the Fed Funds Rate, and still will not be, until September 18th, Powell left no doubt.

That trajectory just mentioned, has changed. There will not be a next rate hike in order to tamp down on consumer level inflation, despite the fact that inflation remains well above the Fed's stated 2% target. There will not be a furthering of the "higher for longer" period of elevated short-term rates. The FOMC has not changed that target since a 25-basis point increase on June 26th, 2023, about 14 months ago. Powell told us where his current concern is.

Powell stated that the slowdown in US labor markets was "unmistakable", and that "We do not seek or welcome further cooling in labor market conditions." On this slowing in demand for labor, Powell commented, "The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions."

On short-term rates themselves, the Chair was direct, however on where Powell sees a terminal rate, or how much easier policy will need to get, he does not and cannot know..."The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks."