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As The Recession Asserts Itself, The Fed Takes A Hard Line Sinks Stocks – Forbes

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Equity markets were in a holding pattern all week waiting for some tidbits from the Federal Reserve’s (Fed) annual Jackso…….

MBA US Refinances % Total Applications

Universal Value Advisors

Equity markets were in a holding pattern all week waiting for some tidbits from the Federal Reserve’s (Fed) annual Jackson Hole Symposium; especially waiting for Chair Powell’s Friday eloquence. Through Thursday, only the DJIA was off more than -1%, the Russell 2000 was almost flat, while the S&P 500 and Nasdaq were down marginally. Turns out that Powell wasn’t so eloquent after all, and, on Friday, the DJIA was down a staggering -1008 points (-3.0%) while the Nasdaq was down -4.0%, the S&P 500 -3.4%, and the Russell 2000 -3.8%. The table shows the weekly change for the major indexes, all falling significantly. Bonds were more muted with the short end up much more than the long end – the yield curve becoming even more inverted (2s/10s now inverted by 35 basis points). Yield curve inversion of this magnitude is always associated with Recession.

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The headline on page A-1 of the Weekend Wall Street Journal said it all: “Fed Chief’s Hard Line Sinks Stocks.” Seems that, after Powell’s eight-minute speech, stock traders have finally seen what the bondies have known for some time, i.e., the Fed is hell-bent on bringing down Y/Y inflation and now appears willing to tolerate a Recession of some significance. The result is that the equity markets are now playing “catch-down.”

Here are some key remarks from Powell’s presentation:

While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. (emphasis ours)

Our responsibility to deliver price stability is unconditional…we will keep at it until we are confident the job is done.

And this quote is key:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. (emphasis ours)

From these remarks, it appears that this Fed Chair is willing to keep raising rates even as economic activity craters (see below), at least until the backward-looking Y/Y inflation metrics (CPI and PCE) come nearer to their 2% goal.

The “Premature Loosening” Issue

It is interesting that he, Powell, would talk about the historical record, i.e., “prematurely loosening policy.” He was clearly referring to the Arthur Burns era of the 1970s when the Fed kept monetary policy too easy even while inflation and inflation expectations were high and rising. But …….

Source: https://www.forbes.com/sites/greatspeculations/2022/08/29/as-the-recession-asserts-itself-the-fed-takes-a-hard-line-sinks-stocks/

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