Skip to content
Weekly Insights
Subscribe
Volume 11, Edition 25 | August 22 – August 26, 2022

Inevitably Hawkish

Doug Walters, CFA
The Fed Chairman struck a decidedly hawkish tone this week. In this week’s edition, we talk about why the Fed needs to keep expectations in check despite notable signs of improvements in inflation.

Contributed by Doug Walters, David Lemire, Max Berkovich, Eh Ka Paw

The Fed Chairman was hawkish in his Jackson Hole speech on Friday, which was an inevitable outcome. He set clear expectations for continued significant rate hikes in the months to come. Expectations drive behavior in economics, and it was important for Powell not to let sentiment turn too optimistic.

It may seem counterintuitive, but The Fed does not want to see investor optimism right now. In the fight against inflation, positive expectations can be the enemy. If investors believe The Fed will slow or stop raising rates because of recent gains against inflation, the result would likely be rising asset prices. Stocks, bonds, and real estate could all benefit. Rising wealth would lead to rising demand for goods, putting upward pressure on inflation.

In that lens, the tone of the Chairman was unsurprising. He needs to keep expectations in check until we have indeed turned the corner on inflation. Allowing sentiment to shift dovish too soon could reverse any gains made on inflation. That is a lesson learned the hard way in the 70s and 80’s when The Fed tried to strike a much more nuanced monetary balance. For now, expect The Fed to maintain steadfast in its hawkish leaning even as we see inflation moderating.

4.6%

Core PCE inflation fell again this month

As measured by the PCE deflator, inflation is still relatively high but has fallen from its February peak of 5.3%.

Headline of the Week

The Fed Chairman’s speech at Jackson Hole was the week’s most significant headline. The brief speech (one of the shortest by a Fed Chair) left its mark on equities, with the S&P 500 down 4% on the week. But we would be remiss not to take a moment to highlight the latest US inflation number, the PCE deflator.

  • The PCE deflator historically has been the Fed’s preferred measure of inflation.
  • On Friday, the data release showed core inflation falling from 4.8% year-on-year to 4.6% in July. That is down from a peak of 5.3% in February.
  • The headline (non-core) number was higher at 6.3%, down from 6.8% in June.

So inflation is coming down, but certainly not enough yet to justify any significant change in Fed policy. We will have to wait another three weeks for the next big inflation release. Until then, we will turn our focus to jobs.

The Week Ahead

As summer draws to an unofficial close, the nation’s economists remain hunched over their spreadsheets, cranking out reports.

  • Everything builds to next week’s Nonfarm Payrolls report (aka the JOBS number). Consensus is calling for some cooling from July’s strength. Despite an uptick in layoff announcements, it is still a favorable market for job seekers.
  • The opening act(s) for Friday’s Jobs report is the ADP Employment Survey on Wednesday and the JOLTS Job Openings report on Tuesday. How the market interprets this trifecta is always an open question.
  • And most importantly, Business Park Drive will see a flurry of economic activity as the final preparations are completed for Strategic’s return to the office. Anyone who missed it, check out Alan’s August Rundown for a great before/after screenshot. We look forward to welcoming clients and colleagues for some old fashion “facetime.”

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources