The speech by Fed Chairman Jerome Powell, expected by investors, may have shaken the markets. During his address, markets could have seen more volatility, leading to a sell-off in risky assets and another wave of dollar appreciation.
On Friday afternoon, when the Fed Chairman spoke in Jackson Hole, the U.S. dollar seemed to strengthen, and again to levels last seen 20 years ago. The U.S. Dollar Index is also attempting today to continue its rise from Friday, surpassing the 109-point level, which could result in the establishment of a new peak in the recent uptrend. Jerome Powell, in his speech, indicated that the Fed is committed to lowering inflation by raising interest rates and keeping them higher for a longer period of time. This, in turn, may have influenced the market's valuation of the Fed's actions on September 21, where investors seem to assume a rate hike of 75 basis points to 3.00-3.25 percent with a 70 percent probability. Before Jackson Hole, this probability was around 50 percent.
In Powell's view, the right thing for the Fed to do is to continue the monetary tightening cycle until inflation is within the 2 percent target. The Fed seems to be looking more broadly at the data than a horizon of one or two months, and a possible peak in inflation may not change anything here for the moment. The Federal Reserve chairman also warned against loosening monetary policy prematurely. This may have dashed the market's hopes for a so-called Fed pivot, a 180-degree change in attitude. According to Jerome Powell, fighting inflation may be "painful" for the economy to some extent, but it is better than letting inflation get even more out of control.
Such statements may have been followed by a retreat from risky assets in the financial markets. On Friday, major U.S. stock indexes took a dive and erased all potential gains from August. The Dow and S&P 500 lost 3.03 percent and 3.37 percent, respectively, while the Nasdaq Composite lost 3.94 percent, its biggest drop since mid-June. This morning, futures also seemed to show potential losses, dropping between 0.7 percent and 1.3 percent.
The cryptocurrency market was also not indifferent to the Fed chairman's words. Bitcoin, which cost $25,000 as recently as mid-August, slipped below the $20,000 level at the end of the month and appears to be approaching its June low. Ethereum, which recently cost $2,000, is now priced below $1,500. Thus, one can see that the market has begun to depend on events in the real economy and on the actions of the Fed, much like the traditional financial markets, to which, after all, it was supposed to be an alternative.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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