Powell at J-Hole: must there still be pain as "we are navigating by the stars under cloudy skies"?

J-Star, unlike the other "stars" (r-star, u-star, etc.) is a fully observable variable that describes how Jay Powell is the star of J-Hole and what he says carries more weight than any other variables.  When J-Star is inserted into your equation all other coefficients go to zero and therefore have no impact.  WWPD, "What Will Powell Do?" is important for markets.  I'm being facetious of course. 

Expectations play a prominent role in  today's economic models and Fed policy (this wasn't always the case, see here). If you followed Powell's speech one thing he didn't mention was cutting interest rates.  Highlights of the speech focused on uncertainty around the post-pandemic labor market dynamics and how labor market tightness feedbacks into wages and inflation.

In today's speech Powell didn't use the word "pain" but he did say:

"Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions." and "We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response."

So I guess the Phillip's curve is alive and well, while it remains a topic of debate. 

Markets didn't seem to react much too strongly to Powell's speech and market expectations are for 2024 rate cuts.

One other thing Powell mentioned again was that 2% remains the Fed's inflation goal, despite some debates and calls for changes to the target. 

The current Atlanta Fed GDP estimates are 5.9% and Powell acknowledged that growth has continued to come in above estimates this year.  It's hard to fathom 2% inflation with real growth at 5.9%, but perhaps it's possible.

We'll get more data on employment and inflation between today and the meeting that could change market expectations.  The next FOMC meeting is September 20th along with updated dot plot, for now Powell's journey to get inflation back to targe will have to ramble on:

"..the autumn moon lights my way

For now I smell the rain, and with it pain, and it's headed my way

..but I know one thing I've got to do
Ramble on, the time is now" - Ramble On, Led Zeppelin