Rachel’s note: Last week, Federal Reserve chairman Jerome Powell delivered a speech at the Jackson Hole Economic Symposium.
It’s an important annual event surrounding global economic issues.
Yet, the markets didn’t like what Powell had to say, especially his remarks about inflation and central bank policy.
So today, Casey Research friend and financial expert Nomi Prins will break down his statements… and what they mean for the future of the economy and your money.
By Nomi Prins, editor, Inside Wall Street with Nomi Prins
Federal Reserve chairman Jerome Powell delivered a much-anticipated speech at the Jackson Hole Economic Symposium on Friday.
That is the annual three-day event, where prominent central bankers, finance ministers, and academics from around the world discuss economic issues, implications, and policy options.
The markets were watching closely. And they didn’t like what Powell had to say about central bank policy.
He said that the Fed is “taking forceful and rapid steps” to fight inflation.
The Dow dropped about 1,000 points (or 3%).
But it’s what he didn’t say that interests me most.
Today, I’ll explain my thoughts on what Powell’s speech means for the markets, the economy, and your money.
What Powell Said
This is one of the main takeaways from his speech,
With inflation running far above 2%, and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.
The markets hated that phrase. The Dow went on to tank by 1,000 points on Friday after he spoke.
But to me, that statement is relatively meaningless. It’s because of the word “estimates,” which is based on constantly changing incoming data.
Moving on from that, he also said,
Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.
This is Fed-speak for giving them maximum flexibility. That’s how those words are chosen. Things like “evolving,” “outlook,” and “data totality.”
His speech was about eight minutes. Why was it so short?
Well, it’s because Powell only emphasized what he’s already said, with a little bit of historical context and even less overall context than he’s used in the past.
It’s like what you do when you want to win an argument by bullying instead of using logic.
So he outlined three lessons from history.
The first is that central banks can and should take responsibility for delivering low and stable inflation.
But to him, the best way to do that is by crushing the labor market – and the economy, if it happens to get in the way.
Second, he used this wonky phrase from old Alan Greenspan times – “rational inattention.”
That was an attempt to explain that the really big danger with high inflation is not that people can’t pay their bills, like their utility bills. It’s that people get used to expecting high inflation because they’re paying attention to inflation. And it becomes some sort of self-fulfilling prophecy.
That’s why he said,
We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored.
Again, attack the economy.
Third, he said,
We will keep at it until we are confident the job is done.
The markets hated that, too. And that’s because they know that the Fed is constantly, and I mean constantly, moving goalposts around to substantiate whatever it does or doesn’t do. My book Collusion shows so many examples of that over the years.
What Powell Didn’t Say
Now, following that speech, I seriously question Powell’s grasp of economics in general.
This is a man no American elected, who is willing to sacrifice other people’s pain to secure his historical spot as king inflation-fighter.
And that’s while he’s fighting a battle in which more than half the fight is unwinnable.
That’s because the Fed cannot control the main driver of inflation today – the supply chain. As I have said before – and I’m going to say it so many times again – the Fed cannot produce oil or food.
But beyond that, Powell left out so much.
He said nothing about how the Fed inflated its balance sheet from $800 billion before the financial crisis of 2008 to nearly $9 trillion during the pandemic. And that’s on top of about $41 trillion that the worldwide central bank community added.
He doesn’t seem to know that today’s unemployment rate is exactly what it was when the Fed pivoted to cutting rates in 2019.
He also didn’t use the word “recession” as a possible outcome of current policy in this particular speech. He didn’t say that U.S. GDP growth has been negative, or in technical recession, for the past two quarters.
What I Took From Powell’s Speech
So here is my main takeaway…
Commodity price inflation has nothing to do with the Federal Reserve or central bank policy. I think, for example, that fuel prices are going to rise into the winter. That’s based on so much data. It’s going to be worse in Europe than in the United States.
Food prices will rise as a result.
Rents will rise, because normal people cannot afford to pay higher mortgage rates to buy their homes. And that basically gives existing landlords free rein.
Now, home prices have fallen, and they may continue to fall a bit. But the people buying the most expensive homes with cash, along with private equity and hedge funds, are going to remain in control of the housing market.
Because of all of this, The Great Distortion – that gap between mortgage payments and rent – is going to grow.
Now, the markets in general are going to continue to struggle to figure out whether the Fed is incompetent, dangerous, or both.
And as I’ve also said before, the markets hate uncertainty more than they hate losing their access to cheap money.
But I still firmly believe the Fed will have to pivot. It’s going to go through three stages.
The first is a reduction in the size of rate hikes.
The second is a pause in rate hikes.
And the third is rate cuts, when it becomes obvious that the Fed is killing the economy.
And each of those stages is going to bring about opportunities in our five key sectors.
The first stage could happen as soon as September 21.
[Managing Editor’s note: This is the date of the next Federal Open Market Committee (FOMC) meeting. It is typically at these meetings that the Federal Reserve announces any interest rate or monetary policy changes.]
So I remain confident in our Great Distortion themes, which are Infrastructure, Transformative Technology, Meta-Reality, New Money, and – especially right now, because it is so key to what’s going on with inflation, the world, and the future – New Energy.
Happy investing, and I will talk to you soon.
Editor, Inside Wall Street with Nomi Prins
P.S. While the world watched Powell’s speech from Jackson Hole last week, the energy crisis continued to build. And one thing is sure: The coming energy shock will have huge financial repercussions for Americans this winter. And if you own stocks… this will hit your portfolio.
That’s why on Wednesday, August 31 at 8 p.m. ET, I’m going to do a deep dive into the energy crisis… and what you can do to prepare your portfolio…
I’ll also name the five sectors I believe will go down during the energy crisis… and the five that will go up.
I urge all my readers to tune in tomorrow night for my Running on Empty Summit. Just click here to save your spot.