By Bryce Johnson
Yesterday’s volatile market reaction was nothing new from what we have seen following practically every FOMC announcement since the summer of 2021. A mid-session reversal has become one of the only consistent elements of this (what I consider to be a) flailing contractionary policy rollout. On the surface of it all, it appears that the Fed’s course of action is working. Core inflation is chipping away at a material clip every month; the headline tape, even more so. Wow, maybe a ‘soft landing’ is possible? But wait. Powell shifted the narrative on what has been a fluid price control mandate. Again. Yesterday, he commented that while the rate of price increases are continuing to cool off, it is now the “persistence” factor of that slowing rate of increase that the Fed is focused on.
How do we ensure that inflation, while coming down, will stay down? Well, by hurting the economy of course. Powell said that lone CPI numbers are not sufficient to steer the committee off of a continued-periodic-rate-hikes-in-perpetuity course but instead he needs “confirmation” by way of seeing the financial markets “reflecting the shifting landscape” and for unemployment to actually go up. It is worth noting that aiming for a higher unemployment rate essentially flouts the second component of its dual mandate, which is to maximize employment. So, which is it? A soft landing or a recession? I can’t help but to consider those to be mutually exclusive of one another. I went back and read the transcription of last December’s presser. At that time exactly one year ago, Powell expected inflation to be at 2.6% in December 2022. Additionally, he stated that it would require only three rate hikes for all of 2022 to accomplish that objective. If we go back to the March meeting he was asked by Steve Liesman from CNBC if the Committee would consider hikes above .50% “like .75% hikes” and his answer was that he and the Committee had not even considered it up to that point. The next meeting the FOMC raised the Fed Funds Rate by .75%. I do not mean for this to be a piling on of J. Powell. What these last 18 months have shown us though is that the Committee may not know exactly what, at any given time, it is trying to accomplish. And Powell is no dummy. I assume he understands the collective awareness of the markets.
Based on his pivot in yesterday’s announcement, is he embracing a new version of “fed speak” – the famous way in which former Fed Chair Alan Greenspan described the economic conditions of the day and the Fed’s implied direction moving forward in a way that no one quite understood what he was saying – that makes the market guess whether the plain spoken words that this Committee says should not be taken literally? Whatever the case may be, perhaps the markets should become aware that reacting so significantly to this Committee's sentiment at any given time is a fool’s errand.
Bryce Johnson
Principal
Risemint Capital Advisors
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