Powell Wrecks Wall Street’s Goldilocks Fairy Tale… Again

Since the Federal Reserve began its campaign of raising interest rates in March 2022, we’ve said the art of forecasting Fed rate hikes (or, most recently, a “skip” on rate hikes) is straightforward. Basically, the Fed leaks its intentions in advance. You just have to know where to look (and we do).

This is the “no drama” Fed. They may or may not raise rates at any given Fed meeting, but they don’t want to spook markets or start a run on the banks. So, they leak hints to a few choice reporters or offer public testimony, usually two weeks or more before the actual meeting dates. It’s just a matter of knowing which reporters, reading between the lines a bit, and knowing how to translate Fedspeak into plain English.

The next Fed meeting is July 26, so we would normally expect to get clues right about now. This important guidance has arrived right on time.

Jay Powell is preparing the market for another rate hike of 0.25% on July 26, which will bring the Fed’s target rate to 5.50%, up from 0.00% in March 2022. The Fed had raised rates in ten consecutive Fed meetings starting with that March 2022 meeting.

The rate hikes began at 0.25% each, increased to 0.50% and then 0.75% late last year before returning to the 0.25% level in May. At the Fed meeting in June 2023, the decision was made to leave rates unchanged. But the Fed made it clear that this was not the end of rate hikes and was nowhere near the infamous “pivot” (rate cuts) that Wall Street had incorrectly predicted since late 2022.

Instead, the Fed called the June inaction a “skip” of rate hikes but warned the hikes might soon return. That warning has now become reality.

With unemployment at the lowest levels since the late 1960s and inflation stubbornly high, the Fed will continue to prioritize fighting inflation with rate hikes even if it means recession and higher unemployment down the road.

But the Fed has the cause and effect badly mangled. There is no correlation between unemployment and inflation. The Fed may quickly find they’ve created the worst of both worlds – higher unemployment and persistent high inflation, a condition known as stagflation. That will be the end of one of the biggest stock bubbles in history and the start of a world of pain for many investors.

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