The Fed’s Victory Lap Will Be More Like an Obstacle Course

On August 23, Fed Chair Jay Powell gave an address to the annual Federal Reserve conference held at Jackson Hole, Wyoming. This was one of Powell’s most important speeches ever for two reasons – he not only pivoted to interest rate cuts (after Wall Street having been wrong about the pivot timing for two years), but more significantly, he pivoted from concern about inflation to concern about unemployment.

The latter pivot is much more troubling because it signals that a recession is upon us, and the Fed may be too late (as usual) to do anything about it.

For the past two years, we have consistently written that the interest rate pivot was not on the horizon, despite Wall Street predicting one beginning in late 2022 and continuing its predictions through 2023 and early 2024. We also wrote that when the pivot did arrive, it would not be for the reasons Wall Street expected. It would not be a soft landing or a Goldilocks narrative. It would be a hard landing and a recession because that would be the only thing that could shake the Fed out of their inflation-fighting trance.

Now, we’re there.

The mainstream media have got the analysis wrong. They believe the pivot is fine because inflation is no longer a risk. In fact, inflation is still a problem. The rate pivot is coming, and the recession is too (if it’s not already here). Wall Street will crash once they wake up to what the Fed is actually saying.

The interest rate pivot is explicit. Powell said, “The time has come for policy to adjust.” What is less explicit but still clear is the pivot from concern about inflation to concern about unemployment. It’s a pivot from one-half of the Fed’s dual mandate (inflation) to the other (unemployment). And the reason is critical.

Unemployment goes up during recessions and is usually a lagging indicator, meaning that a recession is already here before the rise in unemployment becomes noticeable to policy makers. The Fed will not admit it, but that’s what just happened.

The U.S. economy is a much more powerful force than Fed interest rate changes or White House policy tweaks. It has its own dynamics that are not very amendable to Fed policy even if the Fed pretends otherwise. The U.S. economy does not pay that much attention to electoral politics. It’s too big and moves to its own complex tempo.

Still, this slowdown could be a much more important electoral factor than the policy issues being shouted about. It will clearly help Trump and hurt Kamala as Americans recall the relatively good economic conditions (pre-pandemic) during the Trump administration as described by Powell.

Still, investors may cheer the Trump policies and his possible reelection, but it will be a very bumpy ride between now and Inauguration Day.

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