J Pow's Jackson Hole Party
The Fed, a recession (?), and the state of the job market
After a break from Fed and inflation content last week, it's back to your regularly scheduled programming. All eyes are on Jerome Powell this week, who gave a speech from Jackson Hole earlier this morning. Investors listened eagerly to the address for potential clues about the Fed's September plans. Second quarter Gross Domestic Income (GDI) data was released yesterday, which casted further doubt on the idea that the U.S. economy is in a recession.
This week we're diving into the Fed's conference at Jackson Hole, conflicting U.S growth metrics, and the state of the job market.
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In the News
Market forecasts are powered by Kalshi.com
Another big week ahead. Markets are both cutting their expectations that inflation will grow in August and betting that the Fed will take a hawkish stance come September. Markets are also torn on whether mortgage rates will top 6% this year.
Workcation in Jackson Hole
After a two-year hiatus due to the COVID-19 pandemic, the Federal Reserve and the world's leading economists returned to Jackson Hole this week for its annual economic symposium.
Although the gathering will take place at scenic Grand Teton National Park, the retreat will be far from a vacation.
Historically, the conference has served as a venue for the world's top central bankers to break bread and discuss important economic ideas. The bulk of the event is dedicated to drafting a series of papers related to that year's topic. This year, the subject is "Reassessing Constraints on the Economy and Policy."
Because these papers provide insight into how leading economists think through important policy decisions, traders analyze the market-moving text in detail.
However, the highlight of this meeting is Jerome Powell's speech. Before today, investors' last correspondence from the Fed was through the vague minutes from its July meeting. Investors were hoping for an address this week to provide stronger forward guidance, particularly on what the Fed plans to do with interest rates come September.
In the address, Powell stated that the Fed must continue raising rates until "the job is done." Powell reiterated that taming inflation is the highest priority, asserting "without price stability, the economy does not work for anyone." Powell's hawkish tone suggests the Fed may chart a more aggressive course going into 2023, starting with a potential 75 bps rate hike in September.
The address brought back from memories from Powell's past speeches at Jackson Hole. In 2018, Powell gave his famous "Guided by the stars" speech. In the address, Powell compared the natural rate of unemployment and the neutral real rate of interest to celestial stars, pushing policymakers to base their decisions off of them. A true poetic masterpiece.
Kalshi markets are predicting a 52% chance that the Federal Reserve will hike interest rates by 75 bps or more come September. This is down from 92%, which is what Kalshi markets were forecasting last month.
Fork in The Road
On Thursday, data showed that U.S. Q2 Gross Domestic Income (GDI) rose 1.4%. The report adds another layer of confusion to the heated debate on whether the U.S. economy has entered a recession.
U.S. GDI, which is the total income a country generates from producing goods and services, almost always moves in the same direction as U.S. Gross Domestic Product (GDP).
Why? Well, conceptually, the two metrics are the same. Both GDP and GDI measure the overall economic activity of a country over a period of time. The main difference is GDP measures overall economic activity using final expenditures on goods and services, while GDI measures overall economic activity using the income generated from producing these goods and services.
Despite these similarities, data released Thursday shows the two metrics diverged significantly in the second quarter. The report showed U.S. GDI rose 1.4% while U.S. GDP contracted 0.6% over the same period.
The divergence has left economists puzzled and raises further uncertainty around the state of the U.S. economy. Although the standard definition for a recession is back-to-back quarters of negative GDP growth, the rise in second quarter GDI contradicts the notion that the U.S. economy is in a recession.
The uptick in GDI suggests the labor market and consumer spending are remaining resilient in the face of record high inflation and aggressive rate hikes.
Kalshi markets are predicting a 77% chance that U.S. GDP will grow in the third quarter of 2022. Only time will tell if GDI will follow suit and bring a sense of normalcy back to the economy.
Sounding the Alarm
If you ever meet Larry Summers, don't ask him whether he thinks the glass is half empty or half full. He's made that quite clear this week.
In an interview on Monday, Larry Summers stated his "worst fear would be that the Fed will continue to be suggesting that it can have it all in terms of low inflation, low unemployment and a healthy economy."
Summers blasted the Fed for suggesting that inflation can be tamed without inflicting a painful spike in unemployment. Summers said if this rosy rhetoric were to continue, it could "do further damage" to the credibility of the Fed and leave Americans with "doubt about what lies ahead."
Summers' criticism is nothing new. The ex-director of the White House National Economic Council has repeatedly bashed the Federal Reserve for its 2024 unemployment projections. Summers has stated he expects unemployment to surge beyond 5% in 2024, well above the Fed's projection of 4.1%.
Recent jobs data has not concurred with Summers' pessimistic outlook. Data released Thursday by the U.S. Labor Department showed U.S. filings for unemployment benefits fell slightly last week. The news comes on the heels of a scorching July jobs report, which showed the labor market stayed resilient in the face of back to back rate hikes.
Kalshi markets are predicting just a 22% chance that the U.S. economy will add over 500,000 non-farm payrolls again in August. It seems the labor market may cool down soon.
Feeling bullish on the US economy this week, so we are taking the "Yes" on Q3 GDP > 1% at $0.66. That's all for today, have a great weekend!
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