Jerome Powell Called It Like It Is – Here’s Why I Think That’s a Good Thing

Fed Chair Jerome Powell spoke in Jackson Hole, Wyoming, this morning to much anticipation. As you can see, the markets didn’t like what he had to say.

I’m extremely pleased with his statement, not just because I’m net-short in this market, not just because I moved to cash this week.

But because he said what actually needed to be said.

There is a tremendous disconnect between the stock market’s recent performance and the underlying expectations around earnings and inflation.

Yes, inflation came down a little bit in July. And the August personal consumption number was at expectations.

But we need to shake people by the shoulders. Inflation is still way above a rational level of inflation in the nation. Core CPI is nearly 6%.

The Fed’s target is 2%.

It will take a period of elevated interest rates – possibly 4% by the end of the year – to get us back on track. And we’ll likely need to stay there to drain out excess capital and speculation.

The Fed is moving to “moderate demand” in the economy. And this market is starting to wake up a little to that reality. We’re not here yet… but it did impact momentum this morning…

A Chart Worth Seeing

We’re in the early innings of the Fed’s inflation fight. Powell and his team are doing everything they can to express the need for rate hikes and using words like “pain” instead of saying “we’re heading into a recession.”

Today – more than anything – was about a change of tone. Powell noted that the Fed must act with more hikes and that it can’t loosen policy six to nine months from now.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said. “The historical record cautions strongly against prematurely loosening policy.”

The markets still believe that we’re not in a recession. And fiscal stimulus may help support that claim. But the Fed isn’t “dovish” in any capacity right now.

It can’t be. The PCE Index is still at a 40-year high!

I have said that I anticipated a market shock in September. But I’m starting to believe it will come a month later – in October. My reasoning centers around Europe at the moment. When the cold weather hits Europe – and the sharp uptick in electricity shuts down London pubs, there may finally be a reaction to those stock markets. If Europe’s markets hold up, for now, the U.S. may as well.

But I do want to point out this chart.

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