American writer Mark Twain famously remarked ‘history doesn’t repeat itself but it often rhymes’.

Federal Reserve (Fed) chair Jerome Powell’s Jackson Hole speech to central bankers (25 August) has shown him to be a shrewd student of American economic history.

The hawkish nature of Powell’s remarks sent stock markets tumbling, the Dow Jones Industrial Average, the S&P 500, and the NASDAQ indices fell by 3%, 3.3% and 4% respectively and European shares also fell.

The dollar strengthened, with the pound hitting a two-and-a-half-year low against its US counterpart. It now looks very likely the Fed will increase rates by a further 75 basis points at its next meeting in September (18 September)

Powell looks determined to avoid repeating the mistakes made by his predecessor Arthur Burns during the 1970s. During this period a policy of cheap money, or the setting of low interest rates, resulted in soaring inflation.

US inflation was eventually tamed following the appointment of Paul Volcker as chair of the Fed in 1979. Inflation peaked at 14.85% in March 1980 but fell below 3% by 1983. This was only achieved after Volcker raised the federal funds rate to 20% in June 1981.

In his speech Powell said the Fed’s ‘overarching focus right now is to bring inflation back down’. Powell’s remarks come after the Fed raised interest rates by 75 basis points at its last two meetings to leave the official funds rate at 2.5%.

Growth investors had hoped that Powell would adopt a more dovish approach (or in other words shift to slower rate increases or even pursue rate cuts next year).

This view had been predicated on the fact that the pace of US price increases declined in July as gas prices fell.

This brought down the annual inflation rate to 8.5%. July’s inflation figure, though still high, represented a significant fall from the annual rate of 9.1% recorded in June and prompted market speculation that US inflation had peaked.

However Powell warned that there was ‘no grounds for complacency with inflation, having run well above our goal for some time’.

‘While lower inflation readings for July are certainly welcome. A single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down.’

STAYING HIGHER FOR LONGER

Powell also signalled that a restrictive monetary policy characterised by higher interest rates was likely to last until at least the end of next year.

‘Restoring price stability will likely require maintaining a restrictive monetary policy stance for some time’.

‘The historical record cautions against prematurely loosening policy’.

In June Fed officials anticipated interest rates rising to 3.4% by the end of this year, and 3.8% by the end of 2023.

Money markets (which trade short-term debt) are currently implying that US interest rates peak at 4% early next year.

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