Fed Chief Jerome Powell sobered up Wall Street yet again last week during his latest periodic Federal Reserve (FED) speech and news conference.
As Wall Street attempted to get some sort of “pivot” sign out of the tea leaves of his musings, no such inkling of a softer FED was to be found. Pivot means to stop raising rates and pivot to the other direction, which in this case would be back down.
Instead, stone-faced and dead serious as always, Powell once again splashed his monetary bucket of ice water all over those listening, which by the way, is just about everybody these days.
Although recent economic statistics have shown a tiny bit of pullback in certain economic metrics, the real story is inflation is still north of 7%, and that is more than double the 30-year average.
Seven years of an inflation rate that high and you might as well throw half your money in the trash can. Yes, the math works out that badly.
Wall Street has had some giddy rallies here and there, as tiny glimmers of hope in inflation readings every now and then enticed buyers into the markets.
The latest Consumer Price Index (CPI) showed a slight drop in the prices it measures and with the bad news bears pretty much taking over the stock market lately, any signs that things may be improving send stocks rallying, albeit if only briefly.
One only has to dig a little deeper into inflation statistics, however, to see all is still not well in inflation land.
CPI measures the prices consumers pay using a select basket of goods over time. Sounds accurate enough but the CPI does not tell the whole picture.
The Producer Price Index (PPI) measures costs further upstream at the producer level which are the people that make the stuff the consumer then buys down the line. It’s a peek into the prices consumers will pay (the CPI number) sometime in the future as produced goods trickle down the supply conduits to store shelves.
Like the CPI, the latest PPI report also showed a small drop in year-over-year inflation. But comparing the PPI to historical norms, food inflation soared to a 12-year high, led by a shocking 38% surge in fresh and dry vegetable costs. The Christmas dinner might be a tad smaller this year for many folks and not by choice but rather by necessity.
Making matters worse, there is a “core” inflation number that strips out food and energy, and that core number on the producer level was twice the number the government expected at .4% month over month vs. the .2% expected.
Producer inflation costs eventually get directly passed on to who?
Because Jerome Powell and his minions at the Fed are well aware that inflation at the producer level is a precursor to inflation at your local store, the Fed won’t back off anytime soon on its raising rates crusade, and will likely keep rates high much longer than Wall Street expects.
What the Fed also knows is its history. You have to scroll back to the 1970s when the Fed faced inflation of a similar magnitude.
In the early 70’s, then Fed Chief Arthur Burns raised rates and smashed their near double-digit inflation, only to soon thereafter bow to political pressure and quickly lower rates again.
Inflation returned with a vengeance and then some and reached dizzying new heights by the late 70’s.
Newly appointed Fed Chief Paul Volker found out in very short order he had to jack Fed rates to 20% in March of 1980 to get the job done and bring prices back down.
The current Fed rate is 4.5%.
Can you imagine what would happen if 20% rates were the required medicine today?
I actually can’t imagine, it would be that bad.
In conclusion, Fed Chief Powell knows his history. Although today’s Fed actions are smashing the market and will soon smash the consumer right along with it, he knows not raising rates high enough and not keeping there long enough, could spell a disaster of unprecedented levels.
No, Jerome Powell nor his Fed will pivot anytime soon Wall Street. It will likely be a very long time before he even thinks it.
“Watching the markets so you don’t have to”
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This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214.