Powell sounds determined

Fed Chairman Jerome Powell testified before the Senate yesterday and the House of Representatives today.

https://www.wsj.com/articles/feds-jerome-powell-to-head-to-t…

**Jerome Powell Pressed Over How Fed Would Respond to Economic Slowdown**
**‘We can’t fail on this. We really have to get inflation down,’ Fed leader tells Congress**
**By Nick Timiraos, The Wall Street Journal, June 23, 2022**

**....**
**Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest rate increases slow the economy sharply but don’t reduce inflation quickly.**

**Mr. Powell on Thursday said that in such a scenario, the Fed would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion....**

**Powell was asked how its rate policies would shift if economic growth stalled and joblessness rose. “In that hypothetical situation, that would be a setting in which inflation could be expected to come down,” Mr. Powell said, which could meet a test the Fed has established to slow or stop rate rises. But he added, “I think we’d be reluctant to cut.”...** [end quote]

The Fed tried to raise the fed funds rate in late 2018 but Powell caved quickly and cut them when the markets fell and hedge funds were hurt by rising interest rates.

But inflation was low at that point.

Powell is very aware of the mid-1970s, when the Fed raised rates aggressively but, in hindsight, backed off too soon and failed to break the back of high inflation, forcing stiffer action later. Powell admires Paul Volcker who increased rates in 1980 to quell inflation despite a serious recession with high unemployment. The stock market hit its secular low in 1982.

Our decisions as investors are deeply impacted by Powell’s decisions. If Powell raises the fed funds rate to neutral and holds it there regardless of the stock market and unemployment rate there will be a recession. I think it’s the right thing to do. I’m not alone.

https://www.wsj.com/articles/fed-official-calls-for-addition…

**Fed Official Calls for Additional Significant Rate Rises**
**Michelle Bowman says the central bank needs to raise interest rates above certain measures of anticipated inflation rates**
**By Nick Timiraos, The Wall Street Journal, June 23, 2022**

**...**
**Economy**

**Fed Official Calls for Additional Significant Rate Rises**
**Michelle Bowman says the central bank needs to raise interest rates above certain measures of anticipated inflation rates**
**Fed governor Michelle Bowman said she strongly supported the central bank’s 0.75-percentage-point rate increase last week.Photo: ann saphir/Reuters**
**By Nick Timiraos**
**June 23, 2022**

**A Federal Reserve official said the central bank would need to raise interest rates aggressively this year in order to combat inflation.**

**Fed governor Michelle Bowman said she strongly supported the Fed’s 0.75-percentage-point rate increase last week and that she would favor raising the central bank’s benchmark rate by another 0.75 point, or 75 basis points, at the central bank’s next meeting, July 26-27...**

**Ms. Bowman said she supported raising short-term interest rates so that — after adjusting them for inflation, or in “real” terms — they are no longer negative. Last week’s rate increase brought the central bank’s benchmark federal-funds rate to a range between 1.5% and 1.75%. Ms. Bowman called for measuring the setting of interest rates against near-term inflation expectations, which certain surveys show are anywhere between 3% and 6%....** [end quote]

The Fed’s ZIRP policy actually produced negative REAL rates for a long time. This produced highly speculative bubbles in all assets. The neutral rate needs to be a positive real rate.

If Powell follows this reasoning there will be many more Fed rate raises to come. This will depress asset prices long before inflation comes down.

Wendy

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If Powell follows this reasoning there will be many more Fed rate raises to come. This will depress asset prices long before inflation comes down.

Inflation won’t come down until we address the 40-year long policy of poverty wage employment.

See the outstanding analysis in post #654715.
https://discussion.fool.com/old-new-sayings-in-economics-3513459…

intercst

4 Likes

If Powell follows this reasoning there will be many more Fed rate raises to come. This will depress asset prices long before inflation comes down.

Also noteworthy that he hasn‘t really started quantitative tightening yet, as he announced in May - although total assets have stopped growing:

https://fred.stlouisfed.org/series/WALCL

May 4 (Reuters) - The Federal Reserve on Wednesday said it will start culling assets from its $9 trillion balance sheet in June and will do so at nearly twice the pace it did in its previous “quantitative tightening” exercise as it confronts inflation running at a four-decade high.

Markets are already throwing quite a tantrum so let‘s see what size balls the Fed really has.

8 Likes

Over the last 10 days the VOO is nearly flat. QQQ is up 2%. Value is down a touch.

ARKK was up 7% today alone. Several Saul stocks are up 6-12% over the last 10 days.

JPMorgan today said they see a 28% jump in the S&P 500 by end of the year with diminished chances of recession.

I’d say the weather forecast is unclear.

The Fed’s ZIRP policy actually produced negative REAL rates for a long time. This produced highly speculative bubbles in all assets. The neutral rate needs to be a positive real rate.

If Powell follows this reasoning there will be many more Fed rate raises to come. This will depress asset prices long before inflation comes down.

Wendy,

I had a long conversation with myself about rates and the economy. My belief is that the rates can and should rise to 2 percent real. In other words 2 percent above the inflation
rate. (So what is the inflation rate? In this case only rate of
inflation that is felt by those that have money to invest matters. In other words, Wendy’s inflation rate.)

The economy will slow no matter what the cost of capital is while it is below the actual cost. In other word, accommodative monetary policy will not avoid a recession and it will produce mal investment.

The reason the economy will slow is that the cost of labor has risen quickly, at pace that the economy has not been able to adjust to through automation and stream lining. And the cost of energy is well above the ten year moving average, anytime the cost of energy is above the 10 year moving average, the economy is experiencing an energy constraint. (This is my observation and it fits into my simple 3 inputs model for the macro economy)

Having said that, a doubling of the unemployment rate to 6 percent is not a bad thing, in fact it might be a very good thing as it might wring a lot of inefficiencies out of the economy that have crept in over the last 7 years or so of over employment. (Unemployment below 5 percent)

Cheers
Qazulight

1 Like

JPMorgan today said they see a 28% jump in the S&P 500 by end of the year with diminished chances of recession.

What a difference from the “hurricane” Jamie Dimon was predicting 3 weeks ago.

https://www.cbsnews.com/news/jamie-dimon-economic-hurricane-…

intercst

2 Likes

Having said that, a doubling of the unemployment rate to 6 percent is not a bad thing, in fact it might be a very good thing as it might wring a lot of inefficiencies out of the economy that have crept in over the last 7 years or so of over employment. (Unemployment below 5 percent)

We may be overstocked with hedge fund managers and venture capitalists, but I haven’t observed any excess of labor when I visit Walmart. There are 15 people standing in line for the 2 checkout lanes that are open.

intercst

We may be overstocked with hedge fund managers and venture capitalists, but I haven’t observed any excess of labor when I visit Walmart. There are 15 people standing in line for the 2 checkout lanes that are open.

My local pizza joint is now closed Tuesdays and Wednesdays due to lack of staff.

2 Likes

We may be overstocked with hedge fund managers and venture capitalists, but I haven’t observed any excess of labor when I visit Walmart. There are 15 people standing in line for the 2 checkout lanes that are open.

intercst,

I am sorry. We have excess employment, not excess labor. The economy is currently both labor and energy constrained.

Cheers
Qazulight

1 Like

We may be overstocked with hedge fund managers and venture capitalists, but I haven’t observed any excess of labor when I visit Walmart. There are 15 people standing in line for the 2 checkout lanes that are open.

My WalMart has 4 conveyor self-checkout lanes each with a separate line, and 12 “quick” self-checkout registers with a single line feeing them all. I always use the 12 with a single line, takes me a few minutes at most, and once I ran in for a single item, grabbed it, checked out, got all the way back to my car (LARGE parking lot) in under 3 minutes!