Financial markets traded sideways the entire week, waiting for Jerome Powell’s Jackson Hole speech on Friday. The Federal Reserve’s Chair held one of the shortest, if not the shortest, Jackson Hole speeches ever – only eight minutes were enough for the Fed to make it clear to markets that it does not pivot on its monetary policy.

Despite the short speech, the impact was profound. Stocks declined sharply, with the Nasdaq 100 index tumbling and closing down more than -4% on the day.

Also, the US dollar rallied.

So what exactly did Powell say, and how did traders react? Here are three takeaways to consider:

• Fed will not pivot even if the economy and markets take a hit
• Stocks remain vulnerable into the second quarter
• Investors bought the US dollar in consequence

During the summer, most of the rhetoric in financial markets was about the Fed’s next move. Yes, the Fed tightening would continue, but at what pace?

Also, will the Fed start cutting rates once the economy cools?

As it turns out, yesterday’s speech, while short, it made clear that no rate cuts are coming any time soon. Also, the Fed is not worried about the stock market, and further declines would not trigger a reaction from the Fed regarding the rates.

Stocks and the dollar reacted sharply to Powell’s speech. After all, the Fed wants demand to cool down and inflation to fall, and one way of achieving both is by letting stocks drop.

As such, stocks should have a hard time rallying after yesterday’s speech. In earnest, while having a negative year so far, stocks rallied during the summer in what looks like a bear market rally. Therefore, a new attempt at the year’s lows should not be excluded.

The currency market also reacted to the Fed’s message. More precisely, the US dollar rallied against its peers, and it might just be the start of a new leg higher after the consolidation during the summer months.

All in all, Powell’s speech at Jackson Hole was everything that markets expected: powerful, concise, and with strong implications for financial markets.   

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