This week, Chairman of the Federal Reserve Jerome Powell popped out of his hole and saw his own shadow. It scared the shit out of him. He declared at least six more weeks of winter, then retreated back into his box.
There will be no interest rate cuts in March.
Thanks a padload, Punxatawny Powell.
If you were looking ahead in the calendar, anticipating an early spring, giddy at the thought of thawing, well…get your booties on. It’s cold out there today. It’s cold every day.
Don’t let the absurdly robust jobs reports fool you. Do not be deceived by a rate of inflation that is literally half of what it was a year ago. The Fed lives in fear of another inflationary event, and we live in their world.
Another Smarch is upon us.
We examined Powell’s comments during a fun and fiery exchange on this week’s episode of Let’s Talk Markets. We welcomed our Macro-Monthly roundtable for the first time in 2024. Claudia Sahm, Kyla Scanlon and Ophir Gottlieb joined co-hosts Dave Lauer and Pink to dig into Powell’s most recent statement.
Gathering at Gobbler’s Knob
On Wednesday, Fed Chair Jerome Powell held a press conference where he dashed hopes of the interest rate cut many hoped would come in March. Interest rates will remain unchanged at 5.25%-5.5%.
Like the broken promise of an early spring, Powell frosted over some otherwise sunny economic data.
The American labor market is enjoying its most robust job creation cycle in half a century. Consumers are spending money like it’s going out of style. Meanwhile, inflation rates as measured by CPI are hovering at 3.4%—a slight uptick from the prior month but a gravitational drop from our 9.1% peak in June of 2022.
Still, Powell said it was highly unlikely that next month would bring interest rate relief for businesses, borrowers, or homebuyers.
The Fed explained in its corresponding policy announcement that "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent".
Is it too much to ask for just a little warmth and sunshine?
Yeah. Yeah it is.
Here’s what Powelll says: “Continued declines in inflation are really the main thing we are looking at. Of course, we want the labor market to remain strong, too. We don’t have a growth mandate. We have a maximum employment mandate and a price stability mandate.”
Translation—we don’t care about your business, your investments, or your pension fund. We care about inflation, not the markets.
The markets heard him loud and clear.
The DOW Jones Industrial Average lost 0.82% of its value on the day; the S&P 500 closed down 1.61%; and the NASDAQ was down 2.23% per cent.
I guess Powell made his point.
Don’t Drive Angry
It’s not all bad though. Actually, most of it is surprisingly good.
Nobody, even in the most optimistic opiate-induced state of sanguinity, would have predicted that we’d get out of 2023 without a recession. But today, just two days after Powell’s downbeat press conference, we received a new jobs report.
And it’s bananas. The American economy produced more than 353,000 jobs this month. That’s twice as many as economists predicted. The 3.7% unemployment rate is a near historical low. Consumer confidence is rocking.
We’re assuming Powell was not a fan of this news. Robust hiring and spending do carry the threat of pushing inflation upward once again. If there was even a thin shaft of light pointing toward an interest rate cut in March, that window is now fully closed. Powell is not rooting for your job or your business.
Or as he explained it on Wednesday, "We're not looking for a weaker labor market. We’re looking for inflation to continue to come down, as it has been coming down for the last six months.”
But clearly, the red hot jobs report means that there is little pressure on Powell to make a move now. And in spite of Powell’s hesitant remarks, there was a somewhat self-congratulatory sentiment to his statement.
He explained that "We're not declaring victory at this point. We think we have a ways to go.”
But go where, exactly? Aside from 2%, that is.
Watch That First Step. It’s a Doozy.
As Claudia Sahm explained during this week’s Let’s Talk Markets roundtable, the U.S. economy is in a state of rebalancing right now. And she explained, “rebalancing is a shit show.”
But is the Fed’s position only adding to our precarious state?
Ophir Gottlieb suggested that the odds of a recession actually go up if the Fed is unable or unwilling to at least be flexible about the possibility of a rate cut. Powell’s near religious devotion to the idea of a 2% target interest rate exists almost in a vacuum from the experiences of everyday Americans.
Sure, we’re spending. But we’re also borrowing, building debt, and struggling to afford housing. And, warns Ophir, big companies say these interest rates are starting to hurt. Borrowing, building and growing are too costly. Businesses face mounting debts. At what point does these circumstances impede investment, development and opportunity in the U.S. economy?
Right, right…the Fed doesn’t have a growth mandate. But, suggests Ophir, there is some concern that the Fed may be acting too slow, that they’re already behind the curve.
Or, as Claudia says, they should have cut rates yesterday.
There is so much daylight between what the Fed should be doing based on reality and what they are most likely going to do.
If you’re anticipating lower interest rates—May is the earliest.
Until then, all we can do is soak up the good economic news. Still, when it comes to good economic news, we all have one thing in common with the Fed. The indicators say we’re doing great, but we seem to believe it’s too good to be true. Clearly, the Fed feels the same way.
The difference is that so many of us down here on the ground floor actually have to live in the disconnect between those positive economic indicators and our real lives. Interest rates that make it impossible to borrow, repay debts, and become homeowners…well, that ain’t helping.
Kyla Scanlon warns that Americans—especially younger Americans—feel a deep sense of hopelessness in this economy. It’s not the Fed’s job to care how we feel. But how we feel is a real factor in how the economy behaves.
And it’s cold out there today. It’s cold everyday.
Relief may be coming eventually. But we’ve got a few months of winter yet, no matter what the groundhog sees.
So I can only say this. Better days are ahead—not tomorrow, but soon.
To quote Phil Conners, “Winter, slumbering in the open air, wears on its smiling face a dream... of spring.”
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.