It's Time to Take Powell At His Word

No more lip service from you, Jay Powell.  The Chairman of the Federal Reserve has notably been sanguine about inflation, the economy and the potential for creating a massive bubble that may be impossible to retreat from.  Words are words, action is action.  And frankly all one has to point to is the 'transitory' phrase used over and over by Chair Powell to find the explanation for higher prices is shallow.

 

So, this time around the Chairman really means business, right?  After all, he has recently stated that inflation is far too high and needs to come down, and fast.  But we know Powell and the committee are between a rock and a hard place.  Tighten using too many rate hikes and risk losing the small growth in the economy.  Too few tightenings or just a 'slow roll' risks allowing higher inflation to take hold and forget about ever getting prices lower again - that may not happen.

 

We see higher goods everyday, be it gasoline, airline tickets, groceries, movie tickets, food, utilities, uber/lyft rides and entertainment.  There is nothing that has gone untouched, and combined with wages not keeping up with inflation it makes for a daunting task to just pay the bills.  

 

The markets respond to Jay Powell's words and comments from the press conference following the meeting along with any speeches or testimony.  This creates volatility and doubt in the minds of investors, and during the month of April (height of confusion and doubt) the volatility index rose sharply and stayed elevated for many days.  That is highly unusual, as 2% moves in the stock indices became the norm.

 

Today, we see the vix is moderately elevated but not screaming higher.  Yet, markets continue to drift sideways to lower.  We can interpret this to mean the market is expecting rate hikes (probably several) and does not seem all that concerned.  There are other issues of course, the prime focus of rate hikes is to arrest the inflation problem which has come about from supply shortages and strong consumer demand.  

 

If the demand (buying of goods/services) is reduced that will have a damning affect on the economy, perhaps even a recessionary period.  That's not really something to fear, contraction is normal and natural in a growth economy.  It just feels bad.  

 

Back to Powell.  He and the committee have signaled they will do whatever it takes.  While it's hard to continually take him at his word when he and the committee have been so late and so wrong, the market seems to be acknowledging him this time. Image by DCStockPhotography Via Shutterstock