September 26, 2022
Forefront‘s Monday Market Update
WHAT IS THE FED DOING?
During Fed Chairman Jerome Powell’s comments last week, I received a funny text from a friend and client.
“Do you feel like he is trying to pick a fight with just about everyone right now?”
I chuckled at the quip but couldn’t help but think about it as his remarks continued. Let’s look at some of those remarks and figure out what the fed is doing.
“We’re never going to say that are too many people working, but the real point is this, inflation, what we hear from people when we meet with them is that they really are suffering from inflation. And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that, there isn’t.”
When a question was posed asking him how long Americans should be prepared to experience the economic turmoil of the past year, he went on to say this:
“How long? I mean it really depends on how long it takes for wages and more than that, prices, to come down for inflation to come down. And so what you see in our projections today is that inflation moves down significantly over the course of next year and then more the next year after that. And I think once you’re on that path, that’s a good thing, and things will start to feel better to people, they’ll feel lower inflation, they’ll feel the economy is improving, and also, if our projections are close to right, you’ll see that the costs in unemployment are, they’re meaningful, and they’re certainly very meaningful to the people who lose their jobs, and we talk about that in our meetings quite a lot.”
When asked what if that pain causes a recession?
“We have always understood that restoring price stability while achieving a relatively modest decline, or rather increase, in unemployment and a soft landing would be very challenging and we don’t know, no one knows whether this process will lead to a recession or if so, how significant that recession would be.”
- The Fed is hoping for unemployment to rise to slow inflation. The fed WANTS people to lose their jobs.
- With job loss comes wages falling, which will also slow inflation. They WANT people to make less money
- They understand that a recession might be the only way to achieve slower inflation.
WHAT! Does that not sound insane to everyone else?
I understand what the Fed is trying to do; they are here to stop or slow rising prices. People despise out-of-control inflation. How they are going about it indicates that they were seriously wrong when predicting inflation is transitory, or in September of 2022, when they predicted unemployment wouldn’t drop below 4% until 2023. They were dead wrong in both accounts, amongst other things, and are playing catch up. That is what happens when you are behind the 8-ball.
We have seen the Fed raise by 75 basis points in the past two meetings, and the Fed Funds Rate now sits at 3.25%. Markets and home prices have come down dramatically, and costs of gas and other commodities are down.
It feels like we have been through a dozen economic cycles over the past 36 months; why not see how the rate hikes shake out and give the economy, and investors, some time to breathe?
The stock and bond markets are the least of my concerns. I know they will recover eventually, and achieve the 194% return over the past ten years (11.4%/yr.), we have to live with the 23% drops. Dealing with losses is awful, but it is part of the deal with risk assets.
It is much easier to recover from a bear market than to recover from losing your job. In 2020 millions of people found themselves out of work. In last week’s press conference, Fed Chairman Powell acknowledged the unemployment rate climbing to 4.4% in their plan, leading to about 1.3 million job losses. Does the Fed need to push so hard to put people through that?
I understand that recessions are a part of the system we have chosen to create, and downturns are unavoidable. Still, the Fed sending us into a recession seems avoidable in terms of avoidable and unavoidable risks.
The good news is that the Fed changes its mind constantly because they are just as bad at predicting the future as everyone else.
So how does this impact all of you?
- The stock market is UP 194% (11.5%/yr) over the last 10 years!
- You wouldn’t earn the 11.4%/yr without enduring the -23% drops.
Stock market calendar this week:
|MONDAY, SEPT. 26|
|8:30 AM||Chicago Fed national activity index|
|10:00 AM||Boston Fed President Susan Collins speaks|
|12 noon||Atlanta Fed President Raphael Bostic speaks on wealth inequality|
|12:30 PM||Dallas Fed President Lorie Logan speaks|
|4:00 PM||Cleveland Fed President Loretta Mester speaks|
|TUESDAY, SEPT. 27|
|6:15 AM||Chicago Fed President Charles Evans speaks|
|7:30 AM||Fed Chair Jerome Powell speaks on digital finance|
|8:30 AM||Durable goods orders|
|8:30 AM||Core capital goods orders|
|8:35 AM||San Francisco Fed President Mary Daly speaks|
|9:00 AM||S&P Case Shiller U.S. home price index (SAAR)|
|9:00 AM||FHFA U.S. home price index (SAAR)|
|9:55 AM||St. Louis Fed President James Bullard speaks|
|10:00 AM||Consumer confidence index|
|10:00 AM||New home sales (SAAR)|
|WEDNESDAY, SEPT. 28|
|8:30 AM||Trade in goods, advance report|
|8:35 AM||Atlanta Fed President Raphael Bostic speaks|
|10:00 AM||Pending home sales index|
|10:15 AM||Fed Chair Jerome Powell delivers opening remarks|
|11:00 AM||Fed Gov. Michelle Bowman speaks on bank competition|
|2:00 PM||Chicago Fed President Charles Evans speaks|
|THURSDAY, SEPT. 29|
|8:30 AM||Initial jobless claims|
|8:30 AM||Continuing jobless claims|
|8:30 AM||Real gross domestic product revision (SAAR)|
|8:30 AM||Real gross domestic income revision (SAAR)|
|8:30 AM||Real final sales to domestic purchasers (SAAR)|
|9:30 AM||St. Louis Fed President James Bullard speaks|
|FRIDAY, SEPT. 30|
|8:30 AM||PCE price index|
|8:30 AM||Core PCE price index|
|8:30 AM||PCE price index (year-on-year)|
|8:30 AM||Core PCE price index (year-on-year)|
|8:30 AM||Real consumer spending|
|8:30 AM||Real disposable incomes|
|9:00 AM||Fed Vice Chair Lael Brainard speaks|
|9:45 AM||Chicago PMI|
|10:00 AM||UMich consumer sentiment index (late)|
|10:00 AM||UMich 5-year expected inflation (late)|
|11:00 AM||Fed Gov. Michelle Bowman speaks on bank supervision|
|12:30 PM||Richmond Fed President Tom Barkin speaks on what’s driving inflation|
|4:15 PM||New York Fed President John Williams speaks on financial stability|
Most anticipated earnings for this week:
About Amit: I am a first generation American, the son of a working-class Indian family, and I lived through my parents’ struggle to find their place in this country, to put down roots that would sustain them as well as their children in a new land. As they encouraged me to excel in school and fostered my hobbies and interests, I was keenly aware of the dynamic between them. I understood that there was a difference between where they came from individually and where we were now. They worked hard in their individual capacities, but they weren’t always on the same page about financial issues – and that can make or break a family’s future. I didn’t know it at the time, but this laid the groundwork for my passion towards financial services and helping families succeed.