Speaking at the Jackson Hole Economic Policy Symposium this morning, Federal Reserve Chair Jerome Powell delivered a slightly less hawkish message than markets had feared, saying that the central bank would “proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data”.

In a speech that recycled a lot of the language used in last year’s appearance, Powell said “Although inflation has moved down from its peak — a welcome development — it remains too high,” and noted “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy”. He warned “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective”.

On the inflation outlook, he said “lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters. Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability”.

With regard to current monetary settings, he avoided direct discussion of the so-called r-star level, saying “we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint”.

But he suggested that “significant further drag in the pipeline” could hit the economy at a lag, again warning that bringing price growth down would likely necessitate a period of “below-trend economic growth,” and “some softening in labour market conditions” – and pointed to “risk management considerations” in suggesting that “doing too much could also do unnecessary harm to the economy”.

The speech comes after a series of hikes that have lifted rates to a 22-year high, helping lower inflation without inflicting obvious damage on the economy. Year-over-year increases in core consumer prices are still running at almost twice the Fed’s target rate, the unemployment rate is nearly unchanged at 3.5 percent, consumer and business spending levels remain elevated, and real-time growth trackers are pointing to accelerating growth.

Taken in sum, Powell’s words lacked the drama associated with previous speeches from Bernanke and Draghi, and fell short of the directness found in his own appearances – but we would argue this is a good thing. Conditions remain far too uncertain for clear-cut and conclusive messaging, and the only reasonable response from monetary policymakers is to take an incremental, gradualist approach to setting rates in the months ahead.

Two- and ten-year Treasury yields slumped as traders lowered odds on another 2023 rate hike, and the dollar fell.

The text of the speech can be found here