Powell's Jackson Hole Speech Amounts to A Declaration that Past Policies Were Wrong

Summary:

History cautions us against "premature" easing - The Fed chairman's speech at the annual meeting of the central bank in Jackson Hole on Friday almost admitted that the argument that "high inflation is only temporary" in the past year or so is wrong.

BUY XAUUSD

Close Time

CLOSED

1735.00

Entry Price

1752.00

1730.00

4299.39 +20.10 +0.47%

50.0

Pips

Loss

1730.00

1729.99

Exit Price

1735.00

Entry Price

1752.00

Fundamentals

Fed Chairman Jerome Powell revealed a clear message Friday at the annual meeting of the central bank in Jackson Hole, namely that the Fed will likely implement further rate hikes in the coming months and is firmly focused on controlling the highest inflation in 40 years.

Powell warned more clearly that continued Fed tightening would cause pain for many households and businesses because its higher rates would further slow the economy and potentially lead to more job losses, which is the price paid for reducing inflation. But failure to restore price stability would mean even greater pain.

Investors have been hoping for a signal that - if inflation shows signs of slowing further - the Fed may slow rate hikes later this year. But Powell said that "that time may not be near".

After raising its key short-term rate by 75 basis points at each of its past two meetings - part of the Fed's fastest series of rate increases since the early 1980s - Powell said the Fed might ease up on that pace "at some point" - suggesting that any such slowing isn't near.

Commenting on the magnitude of the next rate hike, Powell said that either a 50 basis point or 75 basis point increase would depend on inflation and employment data. However, an increase of either size would exceed the Fed's traditional 25 basis point rate hike, which reflects how severe inflation has become.

Powell said that while the lower inflation data reported in July was "welcome," "a single month's improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down." He noted that the history of high inflation in the 1970s when the central bank sought to counter high prices with only intermittent rate hikes, shows that the Fed must stay focused." The historical record cautions strongly against prematurely" lowering interest rates, he said. "We must keep at it until the job is done."

Turn to the market observation. The Jackson Hole symposium is an important annual economic policy windfall for the Fed. The meeting was the first offline appearance by a Fed chairman at the event since 2019, after it was held virtually for two years during the pandemic.

At last year's Jackson Hole symposium, Powell listed five reasons why he thought inflation would be "transitory." Yet instead it has persisted.

Since March, the Fed has implemented the fastest pace of rate hikes in decades in an attempt to curb inflation, raising the benchmark rate by 2 percentage points to a range of 2.25% to 2.5% in just four meetings. These rate hikes have led to higher costs for mortgages, auto loans and other consumer and business borrowing.

In June, Fed policymakers signaled that they expected their key rate to end 2022 in a range of 3.25% to 3.5% and then to rise further next year to between 3.75% and 4%. If rates reached their projected level at the end of this year, they would be at the highest point since 2008.

At the July meeting, Fed policymakers expressed two conflicting concerns that slow the economy enough to ease inflation pressures yet not so much as to trigger a recession, which highlighted their delicate task.

According to the minutes from that meeting, the officials have prioritized their inflation fight. Still, some officials said there was a risk that the Fed would raise borrowing costs more than necessary, risking a recession. If inflation were to fall closer to the Fed’s 2% target and the economy weakened further, those diverging views could become hard to reconcile.

Overall, while Powell's comments today were clearly aimed at setting higher expectations for a longer policy path, we expect that slower growth may continue to test the nerves of policymakers as high inflation and interest rates rise.

XAUUSD: Powell's Jackson Hole Speech Amounts to A Declaration that Past Policies Were Wrong_1

Technical Analysis

Gold prices have been showing negative bias after failing to break yesterday's high of $1760 in the Asian and European sessions. Despite the better-than-expected U.S. core PCE data for July, it also failed to extend its upward trend to the European session highs. Instead, it continued to retreat after slightly touching the mid-point of the session highs. With the break of the key support at the $1742 level, the sharp correction in gold prices during the New York session was in line with expectations.

Gold prices are currently consolidating above the next effective support floor at $1732, and if that level is broken below, any retracement is a great opportunity to go short at highs. However, on the bright side, the intraday outlook could change if the bulls manage to break above the $1755 level. The bulls are bound to try to test the strong resistance level of $1770 again.

Overall, in the short term, although gold has suffered a sharp sell-off, there is also a need for structural repair. As long as the 1732 level is not broken, a bullish repair can still be carried out at the previous bottom. It is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1735

Target Price: 1752

Stop Loss: 1730

Valid Until: 2022-09-09 20:00:00

Support: 1732

Resistance: 1742, 1748

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