Written by George Lagarias, Chief Economist at Mazars
Last Friday, in his annual address at Jackson Hole, Fed Chairman Jay Powell reverted to hawkish form and suggested that the Fed will keep raising rates until inflation’s back is broken.
In eight short minutes most stocks turned negative and the S&P 500 experienced one of its worst days in two years.
None of this should come as a surprise. We are in a bear market and volatility is to be expected. Inflation is extremely high and markets have learned to over-dissect every world the Fed says, that inconsistencies and policy uncertainty are also to be expected.
Traders and investors need to forget what they heard in Jackson Hole. Instead, they need to focus on one leading indicator: Fed Assets. Next month, the Fed is raising its Quantitative Tightening cap from $45b to $95b. Will it siphon money from markets at a fast pace? Its true intentions will be shown in that field, not in policy speeches.
Meanwhile, investors should worry about the longer term implications of the Fed’s stance. The slowdown could become a deep recession. Inflation could turn into deflation. Emerging markets and US exporters are suffering from the strong dollar.
Consumers are at the end of their tether, especially when central banks are designing policies for the expressed purpose of keeping wages down, even during a cost-of-living crisis.
The time when central bank independence is questioned may not be so far away.