The Federal Reserve's objective is still to bring inflation back down to a target of 2%, Fed Chair Jerome Powell said Friday at the Jackson Hole Economic Symposium.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” Powell said. “Without price stability, the economy does not work for anyone.”
He continued by saying that the Fed would keep raising interest rates in a way that would cause the American economy "some pain."
What Happened: Stocks fell following the Fed chair's speech. The S&P 500 lost 3.37% Friday, while the Nasdaq dropped 3.94%.
Greg Jensen, co-chief investment officer of Bridgewater Associates, is expecting even more pain.
Stocks will fall anywhere from 20% to 25% to realign the financial economy with the real economy, he said.
Related: Stocks Plummet As Powell Doubles Down On Fed's Inflation Fight Until 'The Job Is Done'
“Asset markets will decline from 20% to 25%,” he said in an interview with “Bloomberg Markets” on Thursday.
“The market conditions reflect inflation falling quite dramatically, toward the Fed’s target over the next 18-24 months,” Jensen said. “The expected earnings over the next decade haven’t come down at all this year despite the decline in the equity market — it’s all a function of interest rates rising.”
If the Fed is forced to tighten for longer than anticipated because inflation doesn't decline at the expected rate of six to nine months, Jensen expects a "tough road for assets."
Economists believe that between now and the fall, labor data may hold the key for a Fed that is torn between over-tightening and returning to dovish policy too soon. The most recent jobs figures indicate that the economy can avoid a recession, but some analysts are concerned about a wage-price spiral, as the Fed is keeping an eye on pay growth.
Read more: We Are Not In A Recession, And Inflation Is The Reason Why, Says Nobel Prize-Winning Economist
“The reverse of [old monetary policy] led to the situation where financial assets rallied so much more than the cash flows in the economy,” the CIO said. “Generally, for very long periods of time, those things are aligned — asset prices have to pay for cash flows in the economy.”
Citing the disconnect between the financial economy and cash flows, “We’re still 25% to 30% above the normal relationship between cash flows and asset prices,” he said.
Why It Matters: Jensen projects a 4% global decline in the European economy over the next six to 12 months, leaving governments to choose between fighting inflation and promoting economic expansion.
On China, the world’s second-largest economy, he said the country is in a “dangerous” situation as it deals with a real estate bubble, debt, economic recession, COVID-19 concerns and geopolitical uncertainty with Taiwan.
