Medicare Agent News: Powell Threads the Needle

Friday, August 26, 2022

Powell Threads the Needle

By Nicholas Jasinski | Wednesday, July 27

Fed Boost. A less-hawkish-than-feared yet still inflation-fighting-focused Federal Reserve was exactly what markets wanted today, and they got it. The central bank this afternoon raised interest rates by 75 basis points for the second time in as many months. Then, at his regular press conference, Fed Chairman Jerome Powell acknowledged a slowing economy while still emphasizing that inflation was unacceptably high. That combination seemed to thread the needle perfectly.

The Fed isn't giving up the fight against inflation, but it isn't wantonly driving the economy into a recession either. The fed funds rate now stands at a target range of 2.25% to 2.50%.

Stocks rallied after the decision was published and continued to rise through Powell's press conference. The S&P 500 closed up 2.6%, as all 11 sectors rose. The Dow Jones Industrial Average gained 1.4%, and the Nasdaq Composite soared 4.1%, also boosted by big gains from Alphabet (+7.7%) and Microsoft (+6.7%) following their second-quarter results yesterday evening.

It was the largest one-day gain for the tech-heavy index since April 2020. The Nasdaq is still down more than 25% from its November 2021 record close.

That's all well and good for today, and investors can take a victory lap. What direction Fed policy takes from here, however, isn't so clear. It will depend first and foremost on what the incoming economic data shows between now and the central bank's next policy meeting in late September.

Futures pricing now implies roughly two-thirds odds of a 50 basis point increase in September, with one-third odds for another 75 basis points. The market is betting that peak hawkishness is already behind us.

Here's Barron's Lisa Beilfuss writing this afternoon:

During his press conference Wednesday, Powell tried to back away from the more explicit forward guidance investors have come to expect. He emphasized the Fed’s commitment to restoring price stability and said failing isn’t an option, and he said economic uncertainty remains unusually high. Another 0.75-point hike could be necessary in September, he said, but there is a lot of time between now and then and a half-point hike at the next meeting seems an equally reasonable bet.

...In recent weeks, traders have been increasingly betting the Fed would quickly pivot and begin cutting interest rates in the first quarter of 2023. That expectation doesn’t square with a return to 2% inflation, and Powell didn’t say anything Wednesday to endorse the idea that rate cuts would come so soon. Nonetheless, CME data show traders now see rates topping out slightly lower than they did before Powell took the stage.

Just because Powell acknowledged that growth is slowing, that doesn't mean the Fed is getting ready to pivot, Lisa argues. Remember, the Fed is explicitly trying to tamp down demand in the economy to better match a limited supply of goods and labor and to slow down price and wage increases.

That won't happen without some economic pain. “We think it’s necessary to have growth slow down,” Powell said this afternoon. “We do want to see demand below potential for a sustained period to create slack and give inflation time to come down.”

"Slack is effectively a euphemism for higher unemployment," Lisa wrote. "Some economists have suggested the unemployment rate will have to rise to around 5-6% in order for inflation to fall back to around 2%."

That's a long way from June's 3.6% unemployment rate.