Powell Talks Inflation And Wall Street Continues To Stumble

The Newtonian concept of what-goes-up-must-come-down is on full display over the past two weeks as the markets continue to drop from all-time highs. Federal Reserve Chairman Jerome Powell greased the slide with predictions of increased inflation in the near future.

What Happened in Washington: Powell, speaking Thursday at the virtual Wall Street Journal Jobs Summit, glumly predicted that inflation would uptick in the next few months, but not enough to warrant the central bank’s changing the historically low interest rates it has maintained.

“We do expect that as the economy reopens and hopefully picks up, we'll see inflation move up,” said Powell in an interview. “Compared to the economic scenarios we contemplated a year ago, it's good to see where we are.”

Powell offered a reminder that “for several decades, the U.S. and world economy has been in a low inflation world.” While insisting the Fed believes the nation will face “a transitory increase in inflation” he stressed the Fed would not abruptly change course in response.

“I expect that we will be patient,” he said. “There’s a difference between a one-time surge in prices and ongoing inflation.”

See Also: February Retail Sales Rise 4.6%, Online Sales Soar 54.7%: Key Takeaways

Powell offered an assurance that the Fed would not rush to change its policies as the economy regains its strength.

“There’s reason to think that we’ll begin to make more progress, soon,” he said. “But even if that happens, as now seems likely, it will take some time to achieve ‘substantial’ further progress.”

What Happened on Wall Street: The Dow Jones Industrial Average closed down 1.1% at 30,924.14, while the NASDAQ Composite was down 2.11% to close at 12,723.47.

Among the major exchange-traded funds, the SPDR S&P 500 ETF Trust SPY was down 1.24% to 376.70 while the Invesco QQQ Trust QQQ was down 1.64% to close at 304.09.

While the markets reacted negatively to his comments, the 10-year U.S. government bond yield responded positively and recorded a 0.07% upswing to 1.54% by the closing bell.

What's Next: "It is clear that the bond market is pricing in greater inflation on the back of economic reflation this year," said Joe Brusuelas, chief economist at RSM US LLP. "Powell’s statement in our opinion, and its FAIT policy regime is predicated, on the notion that the structural transformation of the economy over the past two decades has a modest disinflationary bias which gives the monetary and fiscal authority greater degrees of freedom when it comes to accommodate shocks to the economy."

"From our vantage point,"  Brusuelas continued, "we think that the optimal action in coming weeks or months may be “Operation Twist III” where the Fed sells treasuries in its portfolio at the front end of the curve, then take the proceeds and purchases bonds at the long end of the curve to damp long term rates, in order to address what market moves that are out of line with economic fundamentals."

Photo of Jerome Powell courtesy Brookings Institution.