• Powell has signalled the Fed is going to keep raising rates and will remain high

• The market was anticpating a pivot but the Central Bank has pushed back

• Inflation has peaked but a good chance it will remain elevated

Price Stability

Investors were looking to Powell to confirm a potential pivot from the Central Bank. The S&P 500, which tracks the 500 largest public U.S. companies, closed down -3.3%.

Failure to restore price stability would mean far greater pain. Powell continued to voice that prices must come down, and at any cost. The burden of higher inflation outweighs a economic slowdown, softening of labor conditions and tempory pain on businesses & consumers.

With the current inflation rate running at a 40 year high, the Fed will do whatever is necessary to bring these price levels as close as they can to their 2% target level. The U.S. currently sits at a CPI of 8.5%.

Powells comment “But a failure to restore price stability would mean far greater pain.“ confirms the Central Banks overall end goal.

“The historical record cautions strongly against prematurely loosening policy” Is another important piece of information from Powell. It’s important to take this rhetoric with a grain of salt, and understand what can have the Fed change in this rate hiking environment. If you have read our previous article, you would see the Fed often finds themselves behind the curve.

Similar to a car overcorrecting on a patch of icy roads. Meaning, will the Fed say they will keep rates higher for longer, but find themselves loosening faster than what the market expects..

There is a significant chance. Watch future inflation readings.

A pivot? Everybody hold up..

The July 27th, the Fed 75bps hike decision was the proverbial “buy the rumor, sell the fact” situation. Markets gravitated to the Fed slowing rate hikes, and we can see this reflected on the chart below as equities rallied the next few weeks.

What would constitute a pivot?

• Inflation coming off faster than what the market expects

• Faster than expected decline in the labor market

The United States labor market continues to be robust. With the most recent Non-Farm Payrolls coming in well above market consensus, this gives more backing to Powell and his hawkish rhetoric.

Despite the factors listed for a pivot, Powell continues to sound the alarms on inflation and will do whatever it takes to bring prices down.

Even if that includes bringing the economy down with it.

Do we call a top here?

Inflation in the United States is still on the rise, but at a slower pace. Below is China Producer Price Index(blue) with United States CPI(orange). If we had to breakdown a few major reasons for a 40 year high in inflation, it would be:

1. Covid Stimulus

2. Covid induced supply chain disruptions

3. Post Covid growth

4. QE, low rates

5. Russia/Ukraine

If the U.S. follows closely to Chinese PPI, this could be a potential indication of inflation peaking. This does not mean we will see a parabolic drop in prices. There could be a similar situation like the year 2000(image above) where we see prices hang around their highs.

Conclusion

Fed Powell has no more insight than the rest of the world. Many of the voting members on the board continue to be behind the curve on where they estimate inflation and the economy will head. Last year, inflation was transitory. This year they will keep rates high to do anything to get prices down.

What if prices drop faster than they expect?

Happy Sunday

FS