Finance

Maintenance workers in front of a housing development sign near new homes in Fairfax, Virginia, on August 22, 2023.
Andrew Caballero-Reynolds | AFP | Getty Images

Being able to buy a home keeps getting harder.
The National Association of Realtors said earlier this month that its housing affordability index fell during the second quarter to its lowest level on record. The reading came in at 92.7 compared with 101.8 in the first quarter. It’s also well below a 180.4 level reached in 2021.

A reading of 100 signals that families earning the median income have the amount of money needed to buy a median-priced home. A reading below points to insufficient median family income to buy a home. The data goes back to 1986.
Incredibly, housing is now less affordable than it was prior to the Great Financial Crisis — when a complete breakdown in lending standards led to a frenzy of speculation that ended in a 33% peak-to-trough decline in housing prices (based on the S&P Case-Shiller 20-City home price index) from July 2006 to April 2009.
Should this make us nervous? 

Arrows pointing outwards

The decline in housing affordability has obviously been highly influenced by the huge increase in mortgage rates, which are now around 7.2%, according to data from Freddie Mac. That’s compared to an average of 4% from the end of the Great Recession in 2009 until the end of 2021. 

In fact, current mortgage rates are nearly triple the level they were at the end of 2020 and beginning of 2021 — when they bottomed out at around 2.7%. Not coincidentally, the first quarter of 2021 turned out to the be peak in housing affordability. 
Since then, housing prices are up 28% despite the massive increase in interest rates. Median household income, which is currently growing at roughly the pre-Covid rate, has not grown nearly fast enough to offset the spike in mortgage rates and the increase in housing prices. The consequence has been the massive drop in housing affordability to new lows. 
I know all the arguments.
A Wall Street Journal article on Wednesday entitled “How High a Rate Can Housing Take?” by Justin Lahart read: “On Wednesday, the National Association of Realtors reported that there were just 980,000 existing single-family homes for sale last month. That was the fewest during the month of July—normally a time of year when a lot of homes are on the block—on record stretching back to 1982.”
Housing prices remain elevated because there is an extreme lack of supply. Inventories of homes for sale are very low because nobody wants to move and give up their 3% mortgage. The trend toward “work-from-home” is another factor causing homeowners to remain in place and therefore suppressing housing inventory. 
It will take years to bring housing supply back in line with demand because new home construction has been insufficient since the great financial crisis. Lending standards have improved dramatically since before the GFC. 
The typical homeowner has much more equity than in the past. Interest rates should start coming down next year as it becomes clearer than inflation is on a sustainable path lower to the Federal Reserve’s 2% target. And so on. 
All of this is likely true. But still, housing affordability is as low as it’s been since at least 1986. Many prospective first-time buyers are at risk of getting locked out of the market forever if something doesn’t change. 
Can insufficient supply alone keep housing prices elevated in the face of such a big increase in borrowing costs? Is it realistic to think everyone will remain in place indefinitely just to keep their low mortgage rate, thereby preventing a flood of supply hitting the market? Will political pressure on the Fed compel the central bank to cut rates more quickly, thereby improving affordability? 
These are all important questions, and I don’t have all the answers. My suspicion is that some combination of labor market softening, tighter bank lending standards, capital markets volatility and rising mortgage rates will bring an end to the Fed’s interest rate hikes sooner rather than later. Since as long as I can remember, the Fed has always chosen the path of least pain, and I don’t think this time will be any different. 
If this means the Fed will implicitly adopt an inflation target above 2% for a short period, then I think that’s what is likely to happen. But ultimately, I continue to believe that the Fed’s interest-rate hikes to date will prove more than enough to slow the economy, reduce inflation to target and potentially induce a recession. 
The “long and variable lag” has proven longer than expected, in no small part because homeowners wisely locked in super-low mortgage rates when they had the chance. But fixed-rate mortgages won’t be enough to nullify the impact of 525 basis points of interest-rate hikes in a historically short period of time. 
Given its importance to the wider economy, a robust housing market will likely be a precondition to achieving a relatively seamless transition to long-term economic expansion. The housing affordability crunch is, and looks to continue to be, a risk factor that could not only hold back the economy’s growth potential but also cause a financial crisis if left unchecked. So, add another ball to the Fed’s juggling act. More

While acknowledging that progress has been made, the central bank leader said inflation is still above where policymakers feel comfortable.
The speech resembled remarks Powell made last year at Jackson Hole, during which he warned that “some pain” was likely as the Fed continues its efforts to pull runaway inflation back down to its 2% goal.
A strong economy and decelerating inflation also give the Fed room to “proceed carefully” at upcoming meetings.

Federal Reserve Chair Jerome Powell on Friday called for more vigilance in the fight against inflation, warning that additional interest rate increases could be yet to come.
While acknowledging that progress has been made and saying the Fed will be careful in where it goes from here, the central bank leader said inflation is still above where policymakers feel comfortable. He noted that the Fed will remain flexible as it contemplates further moves, but gave little indication that it’s ready to start easing anytime soon.

“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in prepared remarks for his keynote address at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
The speech resembled remarks Powell made last year at Jackson Hole, during which he warned that “some pain” was likely as the Fed continues its efforts to pull runaway inflation back down to its 2% goal.
But inflation was running well ahead of its current pace back then. Regardless, Powell indicated it’s too soon to declare victory, even with data this summer running largely in the Fed’s favor. June and July both saw easing in the pace of price increases, with core inflation up 0.2% for each month, according to the Bureau of Labor Statistics.
“The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said.
Powell acknowledged that risks are two-sided, with dangers of doing both too much and too little.

“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he said. “Doing too much could also do unnecessary harm to the economy.”
“As is often the case, we are navigating by the stars under cloudy skies,” he added.
Markets were volatile after the speech, but stocks powered higher later in the day and Treasury yields were mostly up. In 2022, stocks plunged following Powell’s Jackson Hole speech.
“Was he hawkish? Yes. But given the jump in yields lately, he wasn’t as hawkish as some had feared,” said Ryan Detrick, chief market strategist at the Carson Group. “Remember, last year he took out the bazooka and was way more hawkish than anyone expected, which saw heavy selling into October. This time he hit it more down the middle, with no major changes in future hikes a welcome sign.”

A need to ‘proceed carefully’

Powell’s remarks follow a series of 11 interest rate hikes that have pushed the Fed’s key interest rate to a target range of 5.25%-5.5%, the highest level in more than 22 years. In addition, the Fed has reduced its balance sheet to its lowest level in more than two years, a process which was seen about $960 billion worth of bonds roll off since June 2022.
Markets of late have been pricing in little chance of another hike at the September meeting of the Federal Open Market Committee, but are pointing to about a 50-50 chance of a final increase at the November session. Projections released in June showed that almost all FOMC officials saw another hike likely this year.
Powell provided no clear indication of which way he sees the decision going.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
However, he gave no sign that he’s even considering a rate cut.
“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks,” Powell said. “Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”
The chair added that economic growth may have to slow before the Fed can change course.
Gross domestic product has increased steadily since the rate hikes began, and the third quarter of 2023 is tracking at a 5.9% growth pace, according to the Atlanta Fed. Employment also has stayed strong, with the jobless rate hovering around lows last seen in the late 1960s.
“The basic thought that they’re close to done, they think they probably have a little bit more to do … that is the story they’ve been telling for a little while. And that was the heart of what he said today,” said Bill English, a former Fed official and now a Yale finance professor.
“I don’t think this is about sending a signal. I think this is really where they think they are,” he added. “The economy has slowed some but not enough yet to make them confident inflation is going to come down.”
Indeed, Powell noted the risk of strong economic growth in the face of widespread recession expectations and how that could make the Fed hold rates higher for longer.
“It was a balanced but not trend-changing speech, even if the Fed kept the ‘mission accomplished’ banner in the closet,” said Jack McIntyre, portfolio manager at Brandywine Global. “It leaves the Fed with needed optionality to either tighten more or keep rates on hold.”

Getting into details

While last year’s speech was unusually brief, this time around Powell provided a little more detail into the factors that will go into policymaking.
Specifically, he broke inflation into three key metrics and said the Fed is most focused on core inflation, which excludes volatile food and energy prices. He also reiterated that the Fed most closely follows the personal consumption expenditures price index, a Commerce Department measure, rather than the Labor Department’s consumer price index.
The three “broad components” of which he spoke entail goods, housing services such as rental costs and nonhousing services. He noted progress on all three, but said nonhousing is the most difficult to gauge as it is the least sensitive to interest rate adjustments. That category includes such things as health care, food services and transportation.
“Twelve-month inflation in this sector has moved sideways since liftoff. Inflation measured over the past three and six months has declined, however, which is encouraging,” Powell said. “Given the size of this sector, some further progress here will be essential to restoring price stability.”

No change to inflation goal

In addition to the broader policy outlook, Powell honed in some areas that are key both to market and political considerations.
Some legislators, particularly on the Democratic side, have suggested the Fed raise its 2% inflation target, a move that would give it more policy flexibility and might deter further rate hikes. But Powell rejected that idea, as he has done in the past.
“Two percent is and will remain our inflation target,” he said.
That portion of the speech brought some criticism from Harvard economist Jason Furman.
“Jay Powell said all the right things about near-term monetary policy, continuing to hope for the best while planning for the worst. He was appropriately cautious on inflation progress & asymmetric about the policy stance,” Furman, who was chair of the Council of Economic Advisers under former President Barack Obama, posted on X, the social media site formerly known as Twitter. “But wish he had not ruled out shifting the target.”
On another issue, Powell chose largely to stay away from the debate over what is the longer-run, or natural, rate of interest that is neither restrictive nor stimulative – the “r-star” rate of which he spoke at Jackson Hole in 2018.
“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation,” he said. “But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”
Powell also noted that the previous tightening moves likely haven’t made their way through the system yet, providing further caution for the future of policy. More

Wells Fargo repaid $40 million to almost 11,000 clients overcharged for investment advice, the SEC said Friday.
Affected accounts, which were opened prior to 2014, were overbilled for many years, through last December, the SEC said.
Wells Fargo also paid a $35 million civil penalty to the SEC. It neither admitted nor denied wrongdoing.
High fees can erode savings substantially over the long term.

Spencer Platt | Getty Images News | Getty Images

Wells Fargo paid back $40 million to almost 11,000 customers who for years were overcharged on fees for investment advice, the Securities and Exchange Commission said Friday.
The bank also agreed to pay a $35 million civil penalty to settle SEC charges. Wells Fargo neither admitted nor denied the allegations, the agency said.

Certain Wells Fargo financial advisors — including those from legacy firms acquired during a merger — agreed to reduce some clients’ standard advisory fees at the time their accounts were opened, according to the SEC.
However, internal systems failed to account for those reduced advisory fees in some cases, the SEC said. As a result, Wells Fargo overcharged 10,945 accounts — which were opened prior to 2014 — for many years, through the end of last December, the SEC said.
More from Personal Finance:31% of investors are OK with using artificial intelligence as their advisorThere’s no ‘free lunch’ with high-interest cash optionsHousehold debt is at an all-time high, but 2008 was still worse
According to the agency, the bank’s $40 million reimbursement to affected customers includes more than $26.8 million in excessive fees plus interest.
The bank and predecessor firms — AG Edwards and Wachovia — didn’t have written policies and procedures to prevent this overbilling, the SEC said. (AG Edwards and Wachovia merged in 2007; Wells Fargo and Wachovia then did so in 2008.)

“For years, Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them,” Gurbir Grewal, director of the SEC’s enforcement division, said in a written statement.
Caroline Szyperski, a spokesperson for Wells Fargo, said the firm is “pleased to resolve this matter.”

“The process that caused this issue was corrected nearly a decade ago,” Szyperski said. “And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers.”

How high fees can erode savings

Studies have shown that many investors are unaware they pay fees for financial services like investment advice or the mutual and exchange-traded funds they own.
That’s because the financial ecosystem often charges those fees behind the scenes. Customers typically don’t write a monthly check or get money withdrawn from their bank accounts for such services; instead, firms often collect fees from the financial account, like an individual retirement account or a 401(k) plan. Fees are often assessed as a percentage of total assets in the account.
Excessive fees can amount to large sums of money over the long-term.
Consider this example from the SEC, in which an investor makes a $100,000 initial investment that earns 4% a year for 20 years: An investor who pays a 0.25% annual fee versus one paying 1% a year would have roughly $30,000 more after two decades — $208,000, versus $179,000. More

Marvell Technology Group
Source: marvell.com

Check out the companies making headlines before the bell.
Marvell Technology — Shares fell more than 3% before the bell despite the company topping Wall Street’s expectations for the recent quarter. Marvell posted earnings of 33 cents per share, excluding items, on $1.34 billion in revenue. Analysts surveyed by Refinitiv had forecasted 32 cents per share and $1.33 billion. Revenue and EPS expectations for the current period were roughly in line with expectations.

Affirm — The online payment firm saw its stock popped nearly 7% before the bell after reporting stronger-than-expected fiscal fourth-quarter results and fiscal first-quarter revenue guidance. For the recent period, Affirm posted a smaller-than-expected loss of 69 cents per share on revenues of $446 million. Analysts polled by Refinitiv had expected a loss of 85 cents per share on $406 million in revenue.
Hawaiian Electric — Shares tumbled 20% following news late Thursday that Maui County is suing the utility company for damages over the island’s wildfires. The county said Hawaiian Electric left its powerlines energized despite warnings of high winds. Hawaiian Electric told NBC News it was disappointed that Maui County “chose this litigious path while the investigation is still unfolding,”
Nordstrom — The department store retailer lost 3.6% before the bell. Nordstrom topped Wall Street’s quarterly earnings and revenue expectations but stuck by its previously issued full-year forecast calling for a 4% to 6% revenue decline. The company reported earnings of 84 cents per share on revenues totaling $3.77 billion.
Workday — Shares of the enterprise software company rose 3% in premarket trading after Workday reported stronger-than-expected results for the second quarter. Workday said it generated $1.43 in adjusted earnings per share on $1.79 billion of revenue during the quarter. Analysts surveyed by Refinitiv were looking for $1.26 per share on $1.77 billion of revenue. The company did say it expected subscription revenue growth to slow in the third quarter but it has a total subscription revenue backlog of nearly $18 billion.
Intuit — Intuit’s stock fell 1.2% before the bell after the software company topped quarterly expectations but offered a mixed outlook. Fiscal fourth-quarter adjusted earnings came in at $1.65 per share, versus the $1.44 expected by analysts polled by Refinitiv. Intuit posted $2.71 billion in revenue, ahead of the $2.64 billion expected. The company shared stronger-than-expected full-year guidance

Ulta Beauty — The stock rose nearly 1% after the beauty retailer reported second-quarter results that topped analyst expectations, posting earnings of $6.02 per share on $2.53 billion in revenue. Analysts polled by Refinitiv had anticipated earnings of $5.85 per share on $2.51 billion in revenue, according to Refinitiv. Ulta also reported stronger-than-expected same-store sales growth and raised its full-year forecast.
Gap — Gap shares gained 1.8% after the retailer posted mixed quarterly results. Adjusted earnings per share came in at 34 cents, ahead of the 9 cents expected by analysts polled by Refinitiv. The retailer reported $3.55 billion in revenue, shy of the $3.57 billion estimated. Sales dropped on a year-over-year basis and Gap said it anticipates a low double-digit decline in net sales for the fiscal third quarter.
AMC Entertainment — AMC Entertainment shares rose nearly 1% ahead of Friday’s anticipated stock conversion. The company is expected to convert its preferred equity units to common stock at the open.
Netflix — Netflix rose 0.7% after Loop Capital upgraded the streaming giant to buy from hold. Analyst Alan Gould hiked his price target to imply upside of more than 20%, and said the stock is at an attractive price after a recent pullback amid the ongoing Hollywood strikes.
— CNBC’s Jesse Pound, Sarah Min and Michelle Fox contributed reporting More

China is the world’s largest auto market. In the last few years, the country has become a driver of the global push toward electric cars.
The automotive segment, which Nvidia has said it expects to become a billion-dollar business, reported its first sequential decline in quarterly revenue in more than a year.
Other automotive chip companies are also seeing sequential revenue declines in the segment.

Nvidia automotive segment primarily sells chip systems for assisted driving. CEO Jensen Huang has touted it as the company’s “next billion-dollar business.”
Alex Wong | Getty Images News | Getty Images

BEIJING — U.S. chipmaker Nvidia this week soundly beat analysts’ expectations for major revenue lines — except in automotive — as Chinese demand for electric cars moderates.
The automotive segment primarily sells chip systems for assisted driving. Nvidia CEO Jensen Huang touted it last year as the company’s “next billion-dollar business.”

But the unit’s growth has slowed this year. Huang didn’t repeat such projections in the latest earnings call.
In the three months ended July 30, automotive revenue fell by 15% from the prior quarter — the first sequential decline in more than a year.

The sequential decrease primarily reflects lower overall auto demand, particularly in China.

Colette Kress
Nvidia’s Chief Financial Officer

The $253 million segment revenue was also well below the $309.3 million forecast by a FactSet analyst poll.
“The sequential decrease primarily reflects lower overall auto demand, particularly in China,” Nvidia’s Chief Financial Officer Colette Kress said in a statement on the quarterly results.
She said demand for self-driving systems helped automotive revenue grow by 15% from the year-ago period.

Although still a fraction of the chipmaker’s business, automotive revenue has grown rapidly from just over $100 million a quarter two years ago.

China is the world’s largest auto market. In the last few years, the country has become a driver of the global push toward electric cars.
Local EV players such as BYD and Xpeng are creating stiff competition for traditional automakers, partly by playing up technological features.
Chinese original equipment manufacturers are Nvidia’s primary market, said Brady Wang, associate director at Counterpoint Research.
He said the sequential automotive revenue decline could be the result of excess inventory among Chinese manufacturers, as well as their downward revisions of sales forecasts for high-end vehicles in the coming two quarters.

Xpeng exec joins Nvidia

Nio, which sells premium-priced electric cars, is set to release quarterly results on Tuesday. Earlier this month, Xpeng reported a wider-than-expected loss in the second quarter.
Xpeng is one of the few local electric car companies to offer driver-assist software in select Chinese cities. Tesla’s “Full Self-Driving” tech for navigating city streets isn’t fully available yet in China.
On Thursday, Xpeng’s former head of autonomous driving, Xinzhou Wu said he was starting a new job at Nvidia on Friday. That’s according to Wu’s statement on social media, which included a repost of a picture of himself with Xpeng CEO He Xiaopeng and Nvidia’s Huang.

Nvidia is building out an automotive tech business. Pictured here are its autonomous vehicle test cars at the company’s auto garage in Santa Clara, California, on June 5, 2023.
Bloomberg | Bloomberg | Getty Images

Counterpoint’s Wang pointed out that Nvidia’s products are concentrated in the high-end automotive segment. “In the mid-range market, NVIDIA still faces competition from other vendors, such as Horizon Robotics, Mobileye, and some startups,” he said.
Other automotive chip companies are also seeing sequential revenue declines in the segment.

Analog Devices on Wednesday reported automotive revenue of $747.6 million for the three months ended July 29, down by 5% from the prior quarter.
“We think [Analog Devices] may well be a leading indicator of the cresting of the automotive chip cycle,” David Wong, a technology strategy research analyst at Nomura, said in a report Thursday. He pointed out that Mobileye’s and Qualcomm’s automotive chips also saw quarter-on-quarter revenue declines.

A $10 billion-plus opportunity

Nvidia jumped into the automotive opportunity relatively recently.
In an annual report in late February 2022, the company claimed it had $11 billion worth of automotive projects lined up over the next six years.
A year later, Nvidia said in its annual report that automotive project pipeline was now worth $14 billion over the next six years.

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But in May, Nvidia said quarter-on-quarter automotive revenue growth “moderated as some NEV customers in China are adjusting their production schedules to reflect slower-than expected demand growth.”
The company said it would “expect this dynamic to linger for the rest of calendar year.”
In July, retail sales of new energy passenger cars fell by 3.6% from June to 641,000 vehicles, according to the China Passenger Car Association. It said sales for the first seven months of the year are up by about 36% from a year ago.
The slowdown in the fast-growing segment comes as penetration of new energy vehicles, which include hybrid and battery-powered cars, this year reached about one-third of new passenger cars sold in China, according to trade association data.

Read more about electric vehicles, batteries and chips from CNBC Pro

Longer term, car manufacturers are still planning to buy parts for assisted-driving capabilities.
Hesai, which makes light detection and ranging (LiDAR) units often used for driver-assist systems, this month reported second-quarter revenue of 440.3 million yuan ($60.7 million), beating the company’s earlier guidance.
The company shipped about 60,000 assisted-driving LiDAR units last year and has already exceeded that in the first half this year. In all, CEO David Li expects the number of units to more than double this year.
He said the company is shipping with six original equipment manufacturers this year, with 11 planned for next year.
“It’s not really because of the hardware itself.”
“It’s about the combined experience the OEMs are providing to the customer as an ADAS function,” he said referring to the advanced driver-assistance system.
Hesai this month announced further collaboration of its products with Nvidia’s autonomous driving system and simulation platform. More

Nvidia’s A100 GPU, used to train ChatGPT and other generative AI, is shown at the demo center of Nvidia’s headquarters in Santa Clara, California, Feb. 9, 2023.
Katie Tarasov

Check out the companies making headlines in midday trading.
Nvidia — The chipmaker’s stock climbed more than 1% to a record high after the company reported a beat on the top and bottom lines. The strong performance was driven by its data center business, which includes the A100 and H100 AI chips needed to build and run artificial intelligence application. Nvidia also offered strong guidance amid a surge in demand for chips, suggesting sales in the current quarter will grow 170% from the year-earlier period.

AMD, Marvell Technology — Both semiconductor stocks were lower as Nvidia’s earnings momentum fizzled. Shares of AMD slipped nearly 5%, while Marvell pulled back 4%.
Boeing — Shares of the aerospace company shed nearly 3% after Boeing said deliveries of the 737 Max will be delayed after it discovered new manufacturing flaws. Fastener holes on the aft pressure bulkhead on some of the planes were improperly drilled, the company said. Spirit AeroSystems, which builds the fuselages, dropped 16.5%.
Dollar Tree — The discount retailer declined 2% after issuing lower-than-expected third-quarter guidance. The company said it expects between 94 cents per share and $1.04, while analysts polled by Refinitiv had expected $1.27 going forward.
Discover Financial Services — Shares climbed 2% after an upgrade to outperform from Wolfe, which said the company’s “recent underperformance fueled by internal control and risk management deficiencies” could spur a buying opportunity for investors.
Splunk — The cloud stock climbed 13.6% after the company beat Wall Street expectations for second-quarter earnings and raised its guidance. Bank of America reiterated its buy and top-pick ratings on the stock following the report.

Autodesk — Shares added 3.1% after Autodesk reported an earnings beat and higher forward guidance. Autodesk notched an adjusted $1.91 per share and $1.35 billion in revenue, against Refinitiv analyst estimates of $1.73 per share and $1.32 billion in revenue.
Snowflake — Snowflake dipped more than 5% in midday trading even after reporting an earnings beat. The company reported an adjusted 22 cents per share coupled with $674 million in revenue, while analysts polled by Refinitiv forecast 10 cents and $662 million.
Guess — The apparel company soared more than 28% after reporting an earnings beat, highlighted by an adjusted 72 cents per share and revenue of $664.5 million.
— CNBC’s Alex Harring, Yun Li and Michelle Fox contributed reporting.
Correction: Dollar Tree issued weaker-than-expected third-quarter guidance. A previous version misstated the name. More

Many expect a circumspect Fed Chair Jerome Powell when he makes a speech from Jackson Hole, Wyoming on Friday morning.
“I just think he’s going to play it about as down the middle as possible,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “He doesn’t want to get himself boxed into a corner one way or another.”
Markets Thursday braced for an unpleasant surprise, with stocks selling off and Treasury yields climbing.
While the temptation for the Fed now might be to signal it has largely won the inflation war, many market participants think that would be unwise.

Federal Reserve Chairman Jerome Powell testifies before the House Committee on Financial Services June 21, 2023 in Washington, DC. Powell testified on the Federal Reserve’s Semi-Annual Monetary Policy Report during the hearing. 
Win Mcnamee | Getty Images News | Getty Images

Since he took over the chair’s position at the Federal Reserve in 2018, Jerome Powell has used his annual addresses at the Jackson Hole retreat to push policy agendas that have run from one end of the policy playing field to the other.
In this year’s iteration, many expect the central bank leader to change his stance so that he hits the ball pretty much down the middle.

With inflation decelerating and the economy still on solid ground, Powell may feel less of a need to guide the public and financial markets and instead go for more of a call-’em-as-we-see-’em posture toward monetary policy.
“I just think he’s going to play it about as down the middle as possible,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “That just gives him more optionality. He doesn’t want to get himself boxed into a corner one way or another.”
If Powell does take a noncommittal strategy, that will put the speech in the middle of, for instance, 2022’s surprisingly aggressive — and terse — remarks warning of higher rates and economic “pain” ahead, and 2020’s announcing of a new framework in which the Fed would hold off on rate hikes until it had achieved “full and inclusive” employment.
The speech will start Friday about 10:05 a.m. ET.

Nervous markets

Despite the anticipation for a circumspect Powell, markets Thursday braced for an unpleasant surprise, with stocks selling off and Treasury yields climbing. Last year’s speech also featured downbeat anticipation and a sour reception, with the S&P 500 off 2% in the five trading days before the speech and down 5.5% in the five after, according to DataTrek Research.

A day’s wavering on Wall Street, though, is unlikely to sway Powell from delivering his intended message.
“I don’t know how hawkish he needs to be given the fact that the funds rate is clearly in restrictive territory by their definition, and the fact the market has finally bought into the Fed’s own forecast of rate cuts not happening until around the middle or second half of next year,” said LaVorgna, who was chief economist for the National Economic Council under former President Donald Trump.
“So it’s not as if the Fed has to push back against a market narrative that’s looking for imminent easing, which had been the case from essentially most of the past 12 months,” he added.

Indeed, the markets seem finally to have accepted the idea that the Fed has dug in its heels against inflation and won’t start backing off until it sees more convincing evidence that the recent spate of positive news on prices has legs.
Yet Powell will have a needle to thread — assuring the market that the Fed won’t repeat its past mistakes on inflation while not pressing the case too hard and tipping the economy into what looks now like an avoidable recession.
“He’s got to strike that chord that the Fed is going to finish the job. The fact is, it’s about their credibility. It’s about his legacy,” said Quincy Krosby, chief global strategist at LPL Financial. “He’s going to want to be a little more hawkish than neutral. But he’s not going to deliver what he delivered last year. The market has gotten the memo.”

Inflation’s not dead yet

That could be easier said than done. Inflation has drifted down into the 3%-4% range, but there are some signs that slowdown could be reversed.
Energy prices have risen through the summer, and some factors that helped bring down inflation figures, such as a statistical adjustment for health-care insurance costs, are fading. A Cleveland Fed inflation tracker anticipates August’s figures will show a noticeable jump. Bond yields have been surging lately, a response that at least partly could indicate an anticipated jump in inflation.
At the same time, consumers increasingly are feeling pain. Total credit card debt has surpassed $1 trillion for the first time, and the San Francisco Fed recently asserted that the excess savings consumers accumulated from government transfer payments will run out in a few months.
Even with worker wages rising in real terms, inflation is still a burden.
“When all is said and done, if we don’t quell inflation, how far are those wages going to go? With their credit cards, with food, with energy,” Krosby said. “That’s the dilemma for him. He has been put into a political trap.”
Powell presides over a Fed that is mostly leaning toward keeping rates elevated, though with cuts possible next year.

Still no ‘mission accomplished’

Philadelphia Fed President Patrick Harker is among those who think the Fed has done enough for now.
“What I heard loud and clear through my summer travels is, ‘Please, you’ve gone up very rapidly. We need to absorb that. We need to take some time to figure things out,'” Harker told CNBC’s Steve Liesman during an interview Thursday from Jackson Hole. “And you hear this from community banks loud and clear. But then we’re hearing it even from business leaders. Just let us absorb what you’ve already done before you do more.”

While the temptation for the Fed now might be to signal it has largely won the inflation war, many market participants think that would be unwise.
“You’d be nuts to you know, to put out the mission accomplished banner at this point, and he won’t, but I don’t see any need for him to surprise hawkish either,” said Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
Some on Wall Street think Powell could address where he sees rates headed not over the next several months but in the longer run. Specifically, they are looking for guidance on the natural level of rates that are neither restrictive nor stimulative, the “r-star (r*)” value of which he spoke during his first Jackson Hole presentation in 2018.
However, the chances that Powell addresses r-star don’t seem strong.
“There was a sort of general concern that Powell might surprise hawkish. The anxiety was much more about what he might say around r-star and embracing, high new normal rates than it was about how he would characterize the near-term playbook,” Guha said. “There’s just no obvious upside for him in embracing the idea of a higher r-star at this point. I think he wants to avoid making a strong call on that.”
In fact, Powell is mostly expected to avoid making any major calls on anything.
At a time when the chair should “take a victory lap” at Jackson Hole, he instead is likely to be more somber in his assessment, said Michael Arone, chief investment strategist at State Street’s US SPDR Business.
“The Fed likely isn’t convinced inflation has been beaten,” Arone said in a note. “As a result, there won’t be any curtain calls at Jackson Hole. Instead, investors should expect more tough talk from Chairman Powell that the Fed is more committed than ever to defeating inflation.” More

Check out the companies making headlines in extended trading on Thursday.

Customers walk through a shopping mall along the Magnificent Mile in Chicago, March 15, 2023.
Scott Olson | Getty Images

Affirm Holdings —  The stock added 10.8% after its quarterly results came in better than expected. Affirm posted a loss of 69 cents per share on revenue of $446 million. Analysts polled by Refinitiv had estimated a loss of 85 cents per share on $406 million in revenue. The CEO cited sequentially improved credit results and accelerated growth.

Nordstrom — Shares fell nearly 4% after the company reported an earnings and revenue beat in the second quarter. To be sure, sales fell 8.3% from the year-ago quarter. 
Gap — Shares rose almost 2% in spite of a mixed quarterly report. Gap posted 34 cents per share, after adjustments, beating Refinitiv estimates of 9 cents per share. Revenue, however, missed expectations. The clothing retailer reported $3.55 billion in revenue, shy of the $3.57 million estimate. Management reported a significantly improved inventory position, but expects revenue in the third quarter to decline at a low double-digit pace year-over-year, compared with analyst forecasts of a 6.8% decline.
Marvell Tech —  Shares of the chipmaker tumbled more than 5% even as the company’s quarterly results topped Wall Street’s estimates. Earnings per share came in at 33 cents, excluding items, while analysts polled by Refinitiv had estimated 32 cents per share. Marvell posted $1.34 billion in revenue, compared with analyst estimates of $1.33 billion. 
Ulta Beauty — The beauty retailer’s shares gained more than 2% after its second-quarter results came in better than expected. Ulta earned $6.02 per share on $2.51 billion in revenue. Analysts had forecasted earnings of $5.85 per share on $2.51 billion in revenue, according to Refinitiv. The company also raised its full-year forecast.
Intuit — Shares fell more than 2% despite the company reporting fiscal fourth-quarter earnings that beat on both the top and bottom lines. Intuit’s revenue guidance for the current quarter came in below estimates. The company expects first-quarter revenue to rise between 10% and 11%, while analysts had estimated 13% growth.
Workday – The cloud-based enterprise management jumped 4% after posting a beat on the top and bottom lines in the second quarter. The company also raised its fiscal 2024 subscription revenue forecast. More