Reality Bites

Today’s TGIF 2 Minutes was delayed to reflect a speech given earlier today in Jackson Hole, WY by US Federal Reserve Chair, Jerome Powell.

Earlier today (Friday) US Federal Reserve Chairman Jerome Powell spoke in a widely anticipated speech at an annual meeting of the Kansas City Federal Reserve Bank. The market and investing worlds were looking for guidance from the Fed Chair regarding interest rates and future inflation. Part of the reason for the speech being so closely watched goes back to a former Fed Chair. For those old enough to remember, in December 1996 Alan Greenspan made a now famous speech that rocked the markets when he coined the term, “irrational exuberance.” Then Fed Chairman Greenspan commented,

  • “How do we know when irrational exuberance has unduly escalated asset values…?” Greenspan went on, “We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.”*

And down the markets went for a time. 

These days stock and bond market valuations, it could be argued, are even more unduly escalated. Speeches by various Federal Reserve Board governors are eagerly watched. The slightest hint of the reality of 12+ years of Federal Reserve intervention often affects the markets negatively. More recently, the reality of trillions (not billions, but Trillions) of government “stimulation” plus the passage into law of the Inflation Reduction Act of 2022 has bitten the markets again.

What does all of this mean for client portfolios and savings? Only time will tell. Today’s inflation is not going away in a couple of months. In a possible positive scenario, inflation fades within an approximately six-month period but in the meantime continues to escalate prices for food, fuel, and everything in between. In a possible less-positive scenario, inflation stubbornly sticks around for a prolonged period of six to 12 months or more and then leads to a recession or stagflation, an economic scenario with inflation AND slow economic growth. 

Stock prices may or may not already reflect these scenarios. Often markets anticipate events but inevitable surprise can take place.

No one wants inflation, especially the US Federal Reserve. Therefore, Jerome Powell announced earlier today that the Fed “must continue raising rates” until it is confident that inflation is under control. Rising rates typically mean lower stock prices for a time. This reality bites – and in the short-term will continue to bite into consumer spending and economic growth. A possible silver lining could be that current pain in the form of market downturns and volatility leads to less inflation and more rational asset prices at an undetermined point in the future. The timing is completely unpredictable. Please stay in touch with questions or concerns.

*https://www.cato.org/blog/reflections-greenspans-irrational-exuberance-speech-after-25-years

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