From Peter Reagan to Birch Gold Group
When Powell’s Fed aligned itself with the idea that rising interest rates will begin to ease inflation, Wall Street was its first target.
In fact, this economic slowdown that the Fed wants is well let’s go. Stock bulls learned their lesson. Without the promise of eternally low interest rates, the major stock indexes fell into bearish territory.
let’s not forget, the stock market is not the economy. So let’s turn our attention away from Wall Street.
One of the most reliable signals of economic trouble, the Treasury yield curve, has inverted during weeks. Historically, this has warned that the US will fall into recession (at best) imminently.
The Treasury market is also not the economy… So what can we examine that is broadly representative of the active economy?
Gross domestic product (GDP) is the sum of all goods and services produced at national level. It is essentially the measure of all productive economic activity. So what does this look like? Well, US GDP officially turned negative for two quarters in a row. This is a clear case that the US is now in a recession. In fact, it is the job definition of economic recession.
However, it is not officially a recession down to eight National Bureau of Economic Research (NBER) economists say it.
I hope this announcement is coming very soon… Indeed it has been 75 years since the last time a negative GDP like this it wasn’t associated with a total economic recession, according to Charlie Bilello:
Regardless of whether the NBER declares this an “official” recession, for many it has felt like a recession for months, with wages not keeping pace with inflation and consumer sentiment falling to record lows historical pic.twitter.com/CsxFxo1H2x
— Charlie Bilello (@charliebilello) July 28, 2022
Yes, this is all a lot of bad news.
But don’t worry! Despite all the darkness, everything goes exactly to plan.
This is just the beginning of the Fed’s “soft landing.”
Remember, the Fed is trying to cool the economy enough to push inflation below 2%. They hope this is possible by slowly raising interest rates and gradually diverting the extra $8.8 trillion flowing through the economy without breaking anything.
So how’s that going?
Well, the Atlanta Fed president is “cautiously optimistic”:
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, appeared on CBS’ “Face The Nation” Sunday morning with a continued commitment to the 2 percent inflation target and a cautiously optimistic outlook on the way to get there… Bostic believes that the Federal Reserve can achieve its 2% inflation target without seriously damaging the economy.
“Without severely harming the economy” qualifies as optimism?
The strategists of JP Morgan and Co. they agreed with Bostic, suggesting that “a soft landing is more likely than a recession” earlier this month.
Rounding out our little slice of soft-landing market optimism is US Assistant Treasury Secretary Wally Adeyemo, who told the US on September 28 that:
The Biden administration feels confident that the US economy is moving forward and that it is possible to reduce inflation while maintaining growth. We come to this moment from a position of strength, and consumer and corporate balance sheets are in good shape.
Optimism from a senior Fed official, bulls and a member of the Biden administration? Well, obviously.
Unfortunately for the optimists, however, recovery from years of pandemic money printing and multi-trillion dollar budget deficits does not appear to be easy.
Powell’s inflation plan could start another lost decade
Recently, Federal Reserve Chairman Jerome Powell told reporters something interesting:
You will have a positive federal funds rate [that] it could be 1% or so.
He had to specify “positive” because the current fed funds rate of 3% is well below the Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index. This metric excludes food and energy prices. The Fed says this is because food and energy prices are volatile, so core PCE is a more stable measure of prices over the long term. If only we didn’t eat, drive, or use electricity to power our homes, core PCE would also be a useful metric for real people.
Regardless, that’s the number Powell is looking at.
The latest core PCE reading is 4.9%. With the federal funds rate at 3%, that leaves the federal funds rate after inflation negative 1.9%.
This indicates a terminal rate of 5.9%, which means we are only half way through the series of hikes of the type Powell believes the economy requires.
Since the first rate hike in March, the S&P 500 has lost more than 18% of its value: 6 trillion dollars they have disappeared Ten-year Treasury bonds have lost almost 8%.
And that’s not it final, not even closed! This is at best halfway through the Fed’s tightening cycle.
Everyone wonders when the pain will stop
Investors were already “preparing for more pain ahead” last week, and according to a recent article, confidence is faltering. Sam Stovall, chief investment strategist at CFRA Research, said it well:
These are uncharted waters. The market is currently going through a crisis of confidence.
According to CNBC’s live update on September 29, there isn’t much room for optimism: “Traders are increasingly pessimistic, as Thursday’s selloff shows,” said Vital Knowledge’s Adam Crisafulli. “The darkness is back, and it’s even worse than ever,” Crisafulli said in a statement.
The update continued:
A stronger-than-expected jobless claims report did not help sentiment, based on the idea that the Federal Reserve will continue to make aggressive rate hikes to combat inflation without worrying, it will hurt the job market.
Yes, it will hurt the job market! This is obvious. none the tightening of credit makes it difficult to run a business (especially a marginal or unprofitable business).
There is no way for the Fed to reduce inflation without forcing everyone from Fortune 500 CEOs to everyday American families to make tough decisions.
And remember, this is the soft landing.
The good news is that if the Fed pulls this off as expected, inflation will return to normal. The bad news is everything else.
If you’re saving for retirement, you may want to reconsider how your savings are allocated. Both stocks and bonds are way down so far this year, and we’re only halfway through the Fed’s projected rate hikes.
Looking for a safe haven in turbulent markets?
If you’re wondering “How long will my retirement savings last?” then you are not alone. This is one of the reasons why financial planning for retirement is vitally important.
With many of the more common investment options (even a 401k) looking riskier, maybe it’s a good time to consider some so-called investment alternatives like physical precious metals? There is a reason why gold has been considered a safe haven even during the most tumultuous times.
Now is a great time to learn how diversifying your savings with precious metals like gold and silver could create a more stable foundation for your future. It only takes a few minutes and could save you countless hours of regret.
