Fears Return As Fed Warns Americans Of 'Some Pain' As Economy Braces For More Job Cuts

Topline

Though they had recently cooled, fears of an impending recession once again escalated Friday after Federal Reserve Chair Jerome Powell warned economic growth will suffer as the central bank works to ease decades-high inflation—driving a steep stock market decline as more experts worry that even the recently strong job market could soon start to show signs of weakening.

Most experts still aren’t ready to declare a recession is around the corner, but Fed Chair Powell … [+] has grown increasingly cautious in warning of the economic consequences of higher interest rates.

Key Facts

In his highly awaited Jackson Hole speech on Friday, Powell hawkishly proclaimed the Fed would “forcefully” use its tools to combat inflation and cautioned doing so will require a “sustained period of below-trend growth” that will “bring some pain to households and businesses.”

Powell didn’t mention the likelihood of Fed policy causing a recession, but in emailed comments Friday, Oanda analyst Ed Moya says the speech showed the Fed is “committed to restrictive policy that will eventually get this economy into a recession” in order to cool inflation that has remained near 40-year highs for the majority of this year.

“The Fed is flipping the script,” says Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, noting the central bank long supported the market with low interest rates and accommodative policy during the pandemic but now emphasizes price stability—shifting its focus as it did before the Great Recession.

Others agree: Cliff Hodge, the chief investment officer at Cornerstone Wealth, says Powell’s speech “unequivocally implies” the Fed is okay with risking a recession in order to lower inflation and raises the odds of one occurring over the next year.

On Friday afternoon, economists at Goldman Sachs said the speech doesn’t make them believe the Fed will become more aggressive with its policy but that risks remain “tilted to the upside”; they place the odds of a recession over the next year at one in three, but others, including Nomura, believe one will start later this year.

Labor Market

Powell on Friday acknowledged there “will very likely be some softening” in the labor market as the Fed works to bring down inflation. Despite widespread reports of layoffs and hiring freezes, the economy posted impressive job growth for July, with more than half a million jobs added. In a Wednesday note, Goldman economists projected the recent weakness will start to reflect in coming reports and said they expect job openings in particular to only “fall further.” According to PwC, about 50% of U.S. executives are considering or planning on cutting jobs within the next six to 12 months.

Stock Market

Stocks abruptly fell after Powell’s speech on Friday, cutting into a roughly 15% gain since the Fed’s rate hike in June—when many investors concluded the worst of the increases may be over. “If the Fed is going to raise interest rates until the U.S. enters recession, then the stock market needs to be down 20% to 30% from its prior peak,” says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. After climbing 21% last year, the S&P is down nearly 15% this year.

Housing Market

New home sales fell far below expectations in July, plummeting nearly 13% to the lowest level since January 2016, according to data released Tuesday. Last week, home builders and realtors declared a recession in the housing market, as higher home prices and mortgage rates continued to sideline potential buyers and push demand to the lowest level since the turn of the century.

Inflation

Not even further good news on the inflation front was good enough to calm investor fears. The Fed’s most closely watched inflation indicator, the personal consumption expenditures price index, cooled at the slowest pace in more than a year last month, according to Friday morning data, performing much better than economists projected.

The Fed

Thus far, the central bank has hiked interest rates by 2.25 percentage points this year. Goldman says the majority of hikes are behind us and predicts only a 50-basis-point rate hike in September and 25-basis-point increases in November and December. On Friday, however, Powell kept the door open for another 75 basis-point hike, and more aggressive activity would surely rattle markets.

Fears Return As Fed Warns Americans Of ‘Some Pain’ As Economy Braces For More Job Cuts