Last Friday’s speech by Fed Chair Powell was an important shift in the tug of war that has been taking place between the financial markets and the Fed. Up to last week many financial market participants have been of the view that the economy is already in, or rapidly heading for, a recession, which would inevitably result in a major pivot by the Fed away from tightening policy to starting to cut interest rates early next year.

At Jackson Hole, Chair Powell, conversely, set out a scenario where the economy still has momentum, and where inflation has been far higher and stickier than imagined. As a result, he felt rates are likely to both move higher than the market has been expecting and remain there for longer. Markets reacted with a sharp upward shift in the fed funds futures curve, a further surge in the dollar, and another downward move in the equity markets. Yet, as much as the Fed drives markets in the near term, ultimately, when it comes to equity investing over the longer term, it will not be the Fed but earnings growth that matters most.

With the current earnings season now having drawn to a close, in this Economics Weekly we assess the recent quarter's earnings results and why growth might turn out to be much softer than currently expected for 2023.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.