By Kyle Tetting

The 2022 Jackson Hole Economic Symposium left a mark on investors. The annual roundup in Wyoming, sponsored by the Federal Reserve Bank of Kansas City, is always closely watched as it gathers central bankers, policymakers and academics from around the world. With inflation raging, the recent symposium was watched even more closely. Little new information came out of the conference, but one word in particular captured investors’ attention.

We’ve known for a while that the Federal Reserve is monitoring inflation closely and continuing to take steps to contain it. In an effort to slow economic demand, the Fed has already raised its key overnight lending rate from near zero at the start of the year to a range of 2.25% to 2.5% in July. Add in the likely future path of interest rates from the Fed’s June summary of economic projections, and it’s safe to assume there’s at least a little more rate hike ahead.

We know that the impact of Fed policy is often slow to show in the broad economy, but it has become increasingly clear that the Fed didn’t move quickly enough early on. The rate of inflation has persisted well above targeted levels and has only recently begun to show signs of breaking. The Consumer Price Index rose 8.5% in July compared to the prior year, down from June’s 9.1% rate. That decline is a good sign, though even a summer of data is not enough to declare a trend.

In addition to the Fed’s efforts, we also know that inflation soon might start looking lower in year-to-year comparisons simply because prices a year earlier were already high.

None of that implies that prices will decline, only that the rate of increase may finally be slowing closer to the Fed’s long-term target of 2%.

In Jackson Hole, Fed Chair Jerome Powell reaffirmed the Fed’s commitment to keep fighting inflation. One word in particular stood out in his comments: “Pain.”

“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,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

None of what Powell said in his nine-minute statement was new. It was always expected that rising rates would slow economic growth, which is by design and necessary to slow inflation. And yet, the S&P 500 suffered its largest decline in two months the day of Powell’s speech.

Though it’s never a singular news item moving stocks, Fed policy is a particularly strong force. At a time when inflation may finally be naturally slowing, when employment remains stable and profit outlooks are surprisingly strong, a single word seemingly brought markets back down to reality.

The reality, of course, is that stocks are susceptible to a variety of forces. Expectations for pain, on either households or businesses, shape our view of what stocks should be worth. However, the long-term outlook rarely changes as quickly as the short-term.

We’ve talked for quarters about the prospects for recession. We’ve fielded questions about the timing and magnitude while we’ve already seen back-to-back quarters of declining gross domestic product. For a while, it has appeared likely that economic growth would slow through the end of 2022 and into 2023.

More articles and videos from Kyle Tetting on Money Talk

Powell’s pain-if-we-do-pain-if-we-don’t comments echoed the questions we’ve been getting for months with the answer unchanged. As inflation moderates, economic growth will slow. That is the “pain” Powell refers to. That also is a natural part of the business cycle and one that lends itself nicely to the balanced investment approach we’ve relied on for decades. The long-term outlook remains cautiously optimistic, which makes it all the more important to avoid the urge to run from each new challenge.

Nevertheless, with the volatility that returned in the wake of Powell’s comments and as year-end approaches, this fall will be an excellent opportunity for investors to revisit balance. We can all use a reminder of the role that each piece of our portfolio plays, allowing us to look beyond the next challenge to the many investing opportunities still ahead.

Kyle Tetting is president of Landaas & Company. 

Learn more
When Should I …rebalance my portfolio? by Art Rothschild
No recession yet, the White House says, by Joel Dresang
Staying the course is not staying stillby Kyle Tetting
Recessions: Uncertainty suggests balancea Money Talk Video with Kyle Tetting
Investors and the business cycle, a Money Talk Video with Dave Sandstrom
(initially posted Sept. 2, 2022)

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