Stock market investors took a beating on Friday after Federal Reserve Chairman Jerome Powell warned about the upcoming tough times for the US economy in the fight against inflation.
“There will very likely be some softening of labor market conditions, while higher interest rates, slower growth, and softer labor market conditions will bring down inflation. They will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation” said Powell in prepared remarks at the Jackson Hole Wyoming Economic Symposium hosted by the Federal Reserve Bank of Kansas City. His speech was one of the shortest (under 10 minutes), but it packed a heavy blow waking up investors.
In the hours following, the Dow Jones Industrial Average lost over 1,000 points or 3% putting annual losses at 11%. While the Nasdaq Composite’s 3.9% drop puts the tech-heavy composite at a 22% deficit for 2022.
Powell also indicated rate hikes may be longer and larger in the months to come.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time” he added. Currently, the futures market is pricing in a 50%+ chance of a 75-basis point rate hike at the September meeting. Policymakers will also meet in November and December.
Separately this week, the second GDP revision in Q2 remained at 0.6%, confirming that a recession is underway for the US economy after dropping 1.6% in Q1.