Powell Skips Now, Jumps Later

That went about as well as could be expected [The Rude Awakening] June 15, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Powell Skips Now, Jumps Later - The Fed skipped the hike yesterday, as expected. - But Powell signaled not one, but two more rate hikes this year. - The Fed tells Mr. Market that rate cuts are a 2024 thing. [External Advertisement] [The #1 Energy Passive Income Investment for 2023]( It's not a stock, bond or private company... But this little-known alternative investment could hand you BIG MONTHLY INCOME from the oil and gas surge in 2023. [CLICK HERE TO FIND OUT WHAT IT IS]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from gorgeous Asti! I’m driving Pam to Milan in a few hours so she can convert her Filipino driver’s license into an Italian one. I can’t wait, as she can chauffeur me around a bit more confidently! But before that, let’s look at yesterday’s moves by Fed Supremo, Jay Powell. We were correct about the “skip.” What we didn’t foresee was that The Fed would consider two more rate hikes this year and push rate cuts to at least 2024. I had never understood why Mr. Market was pricing in cuts. Powell never gave any indication of a pivot. So I think it’s good the Chairman disabused them of this notion. Let’s review the Fed’s activities. The Skip Ok, the skip was the correct call. Powell still wants to raise, just not right now. I don’t know why this is. Perhaps it’s because he wants to lengthen, but not steepen, the hiking cycle. [SJN] Credit: [The Wall Street Journal]( I can understand that, though I think rates still have to go much higher to squeeze out all the inflation. Quite frankly, this move leaves plenty of room for asset price inflation. And I’m pretty sure that is not what he wants. The Reminder Just a quick reminder as to why we’re going through all this. The Federal Reserve manipulates interest rates to incentivize credit. In this case, the Fed is hiking rates because it wants to reduce the amount of loanable funds in the system, thereby reducing credit in the system. This should reduce the inflation in the system. If the economy were in the doldrums, the Fed would cut rates to open the credit floodgates. If we didn’t have a central bank, the market would determine interest rates. But that’s a whole other conversation. [Do NOT Ignore This Message Hidden In You $1 Bill…]( [Click here to learn more]( On the face of this $1 dollar bill is a set of instructions for EVERYONE in America, which is legally binding… And is the main thing that gives your cash its value. But here’s the thing… This message represents a direct threat to Joe Biden’s plans for your money… Which could put the value of every dollar you own in SERIOUS jeopardy. Can you spot it? [>>Click Here to Learn the Truth About the U.S. Dollar]( [Click Here To Learn More]( The Presser Jay Powell included some important remarks in his opening statement. Regarding the labor market: The labor market remains very tight. Over the past three months, payroll job gains averaged a robust 283 thousand jobs per month. The unemployment rate moved up but remained low in May, at 3.7 percent. There are some signs that supply and demand in the labor market are coming into better balance. The labor force participation rate has moved up in recent months, particularly for individuals aged 25 to 54 years. Nominal wage growth has shown signs of easing, and job vacancies have declined so far this year. While the jobs-to-workers gap has declined, labor demand still substantially exceeds the supply of available workers. FOMC participants expect supply and demand conditions in the labor market to come into better balance over time, easing upward pressures on inflation. The median unemployment rate projection in the SEP rises to 4.1 percent at the end of this year and 4.5 percent at the end of next year. Jay Powell definitely wants more people out of work before he stops hiking. Here’s what he said about inflation. Inflation remains well above our longer-run 2 percent goal. Over the 12 months ending in April, total PCE prices rose 4.4 percent; excluding the volatile food and energy categories, core PCE prices rose 4.7 percent. In May, the 12-month change in the Consumer Price Index came in at 4.0 percent, and the change in the core CPI was 5.3 percent. Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high and the process of getting inflation back down to 2 percent has a long way to go. The median projection in the SEP for total PCE inflation is 3.2 percent this year, 2.5 percent next year, and 2.1 percent in 2025. Core PCE inflation, which excludes volatile food and energy prices, is projected to run higher than total inflation, and the median projection has been revised up to 3.9 percent this year. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. This doesn’t sound like a person ready to stop hiking at all. Later on, Powell said, “We don’t know the full consequences of the banking turmoil that we’ve seen. It would be early to see those.” He was referencing Silicon Valley Bank, Signature Bank, First Republic, and Credit Suisse. The Reaction As my good friend and Daily Reckoning Grand Poobah Brian Maher wrote yesterday, “... Wall Street was hot for a ‘pause’ - yet got a skip.” The SPX tanked on the announcement, before recovering to end the day slightly up. The Nasdaq ended the day up 0.39%. But the Dow was beaten down and stayed down. Most of that was from United Health’s stock taking a beating, to be fair. Still, I really think Mr. Market thought, “This is it. Time to back up the truck.” Instead, it got a “You might want to think about that before you do anything. I’m hiking two more times this year and won’t consider cutting until 2024.” This isn’t what the Fed funds curve had in mind. In the [Journal]( hedge fund Point72 Asset Management economist Dean Maki said, “The bank failures in March are leading the Fed to hike less aggressively than they would have otherwise. It’s defensible to slow down the pace of hiking at this point. But it does make communication more difficult.” Wrap Up Jay Powell balanced his act as well as he could. He smartly alerted the market to future rate hikes, while pushing rate cuts into next year. Powell’s communication skills can use some improvement, but I think he’s finally got Mr. Market’s attention. Rates will remain higher, for longer. And that’s that. Have a lovely day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… The Fed: Hike, Skip, or Pause? [Sean Ring] SEAN RING Good morning from a rainy, soaked Asti! It’s been raining here, refilling our reservoirs and rivers, which were dangerously low this time last year. And the rain has kept it wonderfully cool at night. We’re nearly in summer, and I haven’t used my air conditioner at night yet. May that last a bit longer. But turning to more important things like interest rates… Jay Powell and the rest of the FOMC decide bigly today. I know most think this move is a fait accompli. They’re standing pat, and that’s that. But in this Rude, I’ll show you why doing nothing, in this case, is worse than doing something. Market Refresh I’ve updated our S&P 500 chart since we last looked at it in May. We’ve made a clean break above 4,200 and then 4,300 (#11). There’s no reason to be short this index at the moment. By my reckoning, we can quickly hit the 4,600 to 4,650 range, where there is a bit of overhead supply. But really, there’s not much stopping the index from hitting its all-time highs. [SJN] This chart is Exhibit A the Fed should not skip here. Yesterday’s Inflation Numbers But it seems we’ve got all about asset price inflation in favor of consumer price inflation. Yesterday’s inflation numbers came in as expected. The CPI bumped up slightly. But the core numbers are still too high. [SJN] Credit: [MarketWatch]( To see the numbers in trend form: [SJN] Credit: [The Wall Street Journal]( From the [Bureau of Labor Statistics]( The index for shelter was the largest contributor to the monthly all-items increase, followed by an increase in the index for used cars and trucks. The food index increased 0.2 percent in May after being unchanged in the previous 2 months. The index for food at home rose 0.1 percent over the month, while the index for food away from home rose 0.5 percent. The energy index, in contrast, declined 3.6 percent in May as the major energy component indexes fell. For sure, the numbers are tailing off. And that’s good. At the same time, is the Fed’s demand destruction working too well? Commodities are way off, with oil and gas down hard. That’s not because of the Fed or a strong dollar. The credit belts are tightening, and entrepreneurs see a recession from a mile away. Here are the commodity groups’ performances since the hiking cycle began: [SJN] Livestock and the shiny stuff is up. Everything else has been hammered. Sure, a stronger dollar would contribute to that. But I don’t think that’s the whole story. So what are JPow’s options? [Warning: Will “Bidenflation” Destroy Your Retirement?]( [James Altucher]( If you’re like most Americans, you’ve worked hard for decades to build your financial legacy. And now, as a result of Biden’s disastrous money printing policies, that’s all at risk. According to one top retirement expert, “Bidenflation” threatens to destroy your retirement and make your hard-earned savings worthless. That’s why you must take action right away to protect yourself… [Click here now to get the simple, step-by-step actions to survive “Bidenflation.”]( [Click Here To Learn More]( The Options As I see it, Chairman Pow has three ways to proceed. Hike This one gets my vote. But he won’t do it this time. My reasoning goes like this: if you’re going to continue to hike later, and the market is rallying this hard, and consumer product prices are still high, you may as well hike. If you stop here, the market may interpret it as a permanent stance, provoking an even harder rally in the SPX. Skip From Nikileaks, in the [WSJ]( Federal Reserve officials’ concerns about stubbornly high inflation could lead them to signal that they are prepared to lift interest rates again this year even if they hold them steady on Wednesday. This is doing nothing under the guise of doing something. By skipping, Powell means he won’t raise rates “this time” but fully expects to hike again soon. Perhaps as soon as next month. This seems to be a way to keep the rest of the FOMC onside so there’s no full-blown mutiny when the announcement is made. Again, from Nikileaks: Signaling a rate “skip”—the combination of holding rates steady in June while signaling a high likelihood of a rate rise in July—could be tricky to explain to the public. “If you were absolutely sure you were going to go ahead with an increase at the following meeting, then you should just go now,” said William English, a former senior Fed economist who is a professor at Yale School of Management. Agreed. Pause In this case, a pause means “lettings rates plateau here and then pivot to rate cuts.” Again, if the FOMC chooses to do nothing, it must stipulate that it’s ready to hike any moment. If not, we’ll have out-of-control equity buying. What Powell Will Do I’m sure he’s going for choice B, the skip. But he must execute this step delicately but firmly. Powell must say something like, “We’re giving the market a month to catch its breath, then we’re coming back in full force. So be careful. You’ve got six weeks to sort yourselves out. Until then, I’ll be quiet. But we’re going to hike in July, so price it in.” Then the belief he’ll hike again will be credible. We’re not out of the woods with inflation, either on the consumer or asset sides. He knows that. That’s why I find it puzzling that he’s skipping. But then again, the politics in the Eccles Building must be palpable. What If You’re Wrong, Seanie? If I’m wrong and he hikes, this will be my reaction: [SJN] If he hikes, the market will be down at least 2-3%. Why? Because the last time I looked at the Fed Funds' futures, they priced in a 4.7% chance of a hike. So the entire market would be the wrong way around. [SJN] Credit: [CME FedWatch Tool]( Absolutely no one is looking for a hike. Could this be the perfect time to wrongfoot the market? Sure, if he wanted to do that. I don’t think that’s his game, though. I think he’d rather keep the peace with the other members of the FOMC, who probably want a pause to figure out their next career moves. Wrap Up It’s a delicate balancing act. But in the end, the Fed will attempt to skip. Much depends on Powell’s presser, where he must convince the market a hike is on for the July meeting. You couldn’t pay me enough to be the Fed Chairman. I bet Jay Powell is wondering whether it’s all worth it. Have a great day. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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