A Preview Of Powell's Remarks

This piece was originally posted on August 24th, 2023.

Fed Chairman, Jerome Powell, will be speaking at a conference in Jackson Hole tomorrow. Market participants are expecting further insight into Powell’s thoughts on future interest rate hikes. Many are insisting the Fed is destroying the economy by not pivoting to lower rates. At DKI, we’re highly skeptical of that argument.

Real rates are just over 2%.

With real interest rates (the fed funds rate less the CPI/inflation) just over 2%, it’s hard to think the Fed has overtightened. A better lens to view the problem is that it was a decade and a half of rates that were close to zero and trillions of dollars of quantitative easing that caused the damage. Returning to some semblance of fiscal and monetary sanity might expose the problem, but isn’t causing it.

Part of the problem is I think most of the inflation we’ve had in recent years is due to Congressional overspending and expansion of the money supply. There’s nothing Powell can do to get that under control. As a result, he has to use interest rates to try to remedy the problems caused by excessive spending. That’s a blunt tool where he needs a scalpel.

I expect Powell to reiterate his key messages during his speech:

• The Fed has not made any decisions on future rates and will be data-driven in its decision-making process.
• The economy is stronger than expected meaning more rate hikes are on the table.
• We’re closer to the top than the bottom for rates meaning that future rate hikes will be the 25bp variety instead of the multiple 75bp hikes we saw last year.
• “Higher for longer”.

If you’d like to enjoy some Federal Reserve entertainment, watch the market indexes during his speech. Typically, when Powell says something indicating a lesser appetite for future rate hikes, the indexes start trading up within 1-2 minutes. When he reiterates an aversion to near-term cuts and starts talking about “higher for longer”, indexes trade down quickly.

In the end, I don’t expect the speech will matter much. By the time the Fed has to make a decision, they’ll have another month’s data for the CPI, the PPI, and the still-hot (but cooling) employment market. The conclusion is we’re likely see a lot of stock price volatility tomorrow, but won’t have new information on what’s going to happen at the next Fed meeting.

I’ll also point out the insanity of having a “free market” where one unelected official gets in front of a camera knowing his utterances will move the market up or down. As always, DKI thinking a policy or practice is unwise is irrelevant. It’s our job and intention to find ways to profit from what’s happening regardless of whether we like it or not. Enjoy the speech tomorrow. I’ll post a follow-up if Powell says anything unexpected that changes our view.

GB@DeepKnowledgeInvesting.com if you have any questions.

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