Fed’s Powell Says Inflation Fight Will Bring ‘Some Pain’


Simpler Trading Team

6 min read

In this article:

  • Dow falls 1,000 points on Powell’s statements
  • All three major indexes down by more than 3%
  • Fed doesn’t plan to let up in controlling inflation

A warning of “some pain” quickly turned into fear among stock market participants and the three major indexes gapped down on Friday.

Heavy selling followed remarks from Federal Reserve (Fed) Chairman Jerome Powell where he firmly stated that monetary policy will “bring some pain to households and businesses.”

And that includes the stock market taking its lumps.

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Fed doesn’t back off painful inflation fight

Assessing the stock market selloff today can best be explained with Powell’s hawkish words in his speech at the annual Jackson Hole, Wyo., Fed symposium Friday morning.

“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,” Powell said. “These are the unfortunate costs of reducing inflation.”

He stated that “a failure to restore price stability would mean far greater pain.”

The pain ripped through the market all day Friday.

Once the selling started, it held strong throughout the day. Uncertainty raced through market participants and accelerated into the close.

The Dow closed at 32,283.40 points to fall 3.03% (losing 1,008.38 points on the day). The Nasdaq dropped to 12,152.94 points for a 3.85% rip lower while the S&P 500 crumbled 3.3% to 4,060.45 points.

The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) spiked to 25.61, closing at 17.72% higher. The index anticipates market volatility over the next 30 days and is considered the “fear” index. Anything above 20 is considered high volatility.

The Fed this year has raised benchmark interest rates to 2.25%, and has plans for another .75% increase in late September.

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News events today like the Fed’s Powell speaking can send the market tumbling.

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Fed corrective actions will take time

Powell justified his remarks and the reasons behind continued Fed action to attack inflation and maintain economic stability.

“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” Powell said. “Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.

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

Inflation has been a heated topic from consumers to politicians to traders. Powell, who last year announced that inflation is transitory, said ongoing inflation highlights a particular risk.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” he said.

The stock market felt the pain of Powell’s remarks from quick and deep selling.

Powell explained that the “ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty” are part of the Fed decision process.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said. “Reducing inflation is likely to require a sustained period of below-trend growth.”

Fed, Powell commit to getting job done

Traders can expect the Fed to continue down the path presented by Powell on Friday.

Powell reasserted that the Fed is focused on a policy that will be “sufficiently restrictive to return inflation to 2 percent.” With a tight labor market and inflation holding at a 40-year high, Powell doesn’t see a near-term place to stop or pause.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said.

The Fed will consider all new economic data arising before its September regular meeting. Data before the meeting includes events such as job reports, and economic data releases such as non-farm payroll and consumer cost data.

Even with the current stance of monetary policy tightening, Powell holds that there will likely be a point that is appropriate to slow the pace of the policy. He highlighted that as current high inflation continues, there is a greater chance that “expectations of higher inflation will become entrenched.”

He made clear there will be stern Fed actions ahead to fight inflation.

“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,” Powell said. “We will keep at it until we are confident the job is done.”

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Playing for rebounds, managing risk

Simpler’s traders are assessing how deep this Powell-induced selloff will go, and watching for buy opportunities on any rebound. On a Friday, with this much negative action, the caution is to wait for next week and analyze the effects of the fallout.

An area Simpler’s traders are watching is the technology sector which was bludgeoned on Friday. Leading stocks such as Amazon.com, Inc. (AMZN), Tesla, Inc. (TSLA), Apple, Inc. (AAPL), and Microsoft Corp. (MSFT) all suffered losses, from 2% to 4%. Plays off a rebound may also be found in trading the Nasdaq itself.

Another way to play this uncertainty is to stick to shorter time frames for stock chart technical analysis, particularly the daily time frame.
As is the Simpler way, through all the uncertainty traders are focused on managing risk and not getting caught on the wrong side of emotion-based market moves.

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