Markets went to Jackson Hole looking for a signal. Powell gave them one, and it was not the signal they had hoped for.
The Federal Reserve Chairman's speech was watched closely for any indication of what comes next. He was unusually direct — the Fed is prepared to act as appropriate, even if that means a sustained period of below-trend growth and softness in the labour market.
Prepared to act as appropriate — even if it means a sustained period of below-trend growth and softness in the labour market.
Read plainly, that is a central bank naming the price it will pay. Slower growth and job losses are not being described as risks to be avoided but as costs the Fed will accept in order to bring inflation down. Concern about the economy tipping into recession rose accordingly.
A forecast tells you what a policymaker expects. A stated tolerance tells you what they will permit. Markets had been pricing an eventual pivot; this was an explicit statement that it would not arrive on the terms investors were hoping for.
Our view on positioning follows from that. Where the range of plausible outcomes narrows and the remaining ones do not favour risk, the sensible response is a portfolio built to hold its footing rather than to capture whatever rallies next.
This note reflects our views at the time of writing and is not financial advice, nor a recommendation of any security or strategy. Investing involves risk, including the possible loss of principal.
What Does This Mean for Your Allocation?
A tightening cycle affects a portfolio in accumulation quite differently from one already funding retirement. We're glad to look at where yours stands.
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