The Federal Reserve does not see a 1970s-style inflation upward signal – Jay Powell

The Federal Reserve Chairman made a lot of encouraging comments during his question-and-answer period that got the market moving higher until he might have gotten too loose. 

Powell underscored right out of the gate that the Fed needs to see significant further progress when asked about a specific number or details on when action would be taken to change the current monetary policy.

Lift Off

His answer to the Wall Street Journal report got the market to start showing Powell some of that “Love American Style” appreciation, including fireworks. While admitting inflation is above the target of 2.0% , it has not met the threshold needed to change course, in part because the labor market has a long way to go to be consistent with “full employment.”

• Consequently, the Fed is not at or even near liftoff.
• Nevertheless, the market loved this line, so stocks began to lift off.

Nuanced Changes

Ahead of the question-and-answer period, the Federal Open Market Committee (FOMC) released their statement, wrapping up their two-day meeting.

The changes were subtle, but Fed-watchers got giddy when they removed the word “weak” and mitigated the role of the virus by noting the path of the economy continues to depend on its course rather than “depend significantly.”

Finally, Jay Powell went into how the Fed looks at transitory inflation.

This is a world where price increases happen, but the misnomer is that they will totally reverse. Powell noted that, for the most part, prices go up year after year. I think the Fed is looking for a slower rate of increase. And at some point in the future, a reversion to the mean. At least, this is what I think Powell was saying.

Wall Street totally misread the spike in bond yields earlier this year, and many said the meeting at Jackson Hole, Wyoming would officially change the course of the Fed, and Powell would use this address to make a case for tapering. However, I was less convinced that would happen, considering that we’ll need concrete evidence the Delta variant growth has been decreasing and very strong jobs growth.

Message of the Market

U.S. Fed Funds futures show the market is now fully pricing in 250 basis points (bps) tightening by March 2023.

Five-Year breakeven edged up to 2.62 during Powell’s question-and-answer period before settling at 2.57.

Ten-Year Bond yield yawned.

Keep Fingers Crossed on COVID-19 Deaths

While headlines and actions from the federal government to major corporations are happening in reaction to the rise of the Delta variant, the number of deaths is back to lows, last seen in March 2020.

Portfolio Approach

Today’s Session

Bombshell economic reports this morning, including a very disappointing Initial Jobless Claims.

• Initial Jobless Claims 400,000 -24,000
• Continuing Claims 3,259,053 +133,196

Gross Domestic Product

Came in at 6.5% against consensus of 8.4%.  The miss was so big many experts will be out all day trying to explain it away with an array of excuses, including a surprise decline in inventories.

Personal Consumption Expenditures 11.8% from 11.4%

• Goods 11.6% from 27.4%
• Services 12.0% from 3.9%

Investments -3.5% from -2.3%

• Non-Residential 8.0% from 12.9%
• Residential -9.8% from 13.3%

Exports 6.0% from -2.9%

Imports 7.8% from 9.3%

Government -1.5% from 4.2%

 

Comments

Well, don't think Powell will ever say just just the right words that will make the market crowd happy. Everyone's looking for something to be upset about? We're just happy to be able hear, " Making Money " with Charles while we deliver Meals on Wheels today! Thanks for all the info Charles. Lorin K on 7/29/2021 10:07:13 AM

Get the government out of the way and let this economy go! Harold Hawkins on 7/29/2021 10:15:12 AM

"Transitory" is a slight of word way of saying prices are rising fast now and will never go back BUT the new higher price points will show less aggressive moves going forward. If a price increases now by 10% (which I am seeing) and then only increases 3% the next 2 years I say the inflation rate for 3 years is 16%. Garro on 7/29/2021 6:17:13 PM

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