CAMS Weekly View from the Corner - Week ending 12/15/23
December 18, 2023
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.” Chairman Powell, Post FOMC Meeting Press Conference December 13, 2023
(Note: This is longer than what is typical for us but in light of topic we could not do it justice without some additional length.)
Today we wrap up our 2023 editions with, as our subject title offers, a piece that is meant for the citizen in you more than the investor in you. (Post December 13th Fed meeting we feel is an appropriate time to take a higher level view.)
On the surface this may seem strange separating the two but the truth is all of us wear many hats on any given day and often without realizing those hats, at times, can be at odds with one another.
When it comes to the Fed of the previous 10, 20, and 30-plus years there have been plenty of times their actions have offered a celebratory time for the investor in you while the citizen (head of household/wage earner) in you incurs downstream challenges as a result. (This certainly is more pertinent according to your socioeconomic class.)
To keep it simple think of the head of household/wage earner with a 401K who celebrates the notable increase in their 401K statement (on the back of cheap dollars via Fed policies) while the same head of household/wage earner struggles to make ends meet in light of their wages that when adjusted for price inflation cannot keep up in light of those Fed created cheap dollars. (It is never what you earn that matters only what those earnings possess in purchasing power.)
In time it takes evermore of those worth---less dollars to purchase X asset (stocks included) equaling asset price inflation which is celebrated by the investor class.
Simultaneously, the citizenry at large lose via ever larger segments of society experiencing their wage inflation adjusted earnings unable to keep up with essentials and through this unable to participate in the wealth creation via asset accumulation in stocks, bonds, land, housing etcetera.
This process, over time, hollows out the middle class and leads to a bifurcated social structure (the haves and the have not’s to keep it simple) as fewer and fewer can participate in the Fed induced game of wealth generation via asset price inflation. Ultimately, throughout history, this leads to societal discontent and a loss of social cohesion. Sound familiar?
Will this be a “Welcome to the New Transitory”?
This past Wednesday the Fed held their interest rate policy setting meeting with the customary follow-up press conference.
We have chronicled ad nauseam in recent weeks and months how the Fed has steadfastly stated they are focused on price inflation and their 2% target only. Any talk of interest rate cuts was treated as a topic that was not on their radar. Interestingly, that was until last Wednesday.
Will the redundantly stated 2% target prove to be a new version of the Fed’s “transitory” language which elicits memories of how they assured the citizenry at the start of this price inflation era it was of no concern – it would prove to be transitory.
This until they had to retire said reference – oops we were wrong we didn’t mean that - as Powell later tried to offer it was a misunderstanding relative to what they were trying to convey.
Per our header quote we would offer to Powell to share his “it was our bad but not really it was just a misunderstanding” view to the millions of households who found themselves under water financially in light of the non-transitory price inflation. We digress.
Let’s examine via Powell’s own words as of last Wednesday (last quote) relative to recent statements regarding interest rate cuts – note the dates!
CHAIR POWELL: “So it's the fact is the Committee is not thinking about rate cuts right now at all. We're not talking about rate cuts,”
Chairman Powell, Post FOMC Meeting Press Conference November 1, 2023
Transcript Link: https://tinyurl.com/52bdbvny
POWELL: “ It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.
Fireside Chat at Spelman College, Atlanta, Georgia
December 1, 2023
CHAIR POWELL: “ I mean, the reason you wouldn't wait to get to 2 percent to cut rates is that policy would be, it would be too late.
Chairman Powell, Post FOMC Meeting Press Conference December 13, 2023
Summary of Economic Projections (SEP) & Markets
The Federal Open Market Committee (FOMC) is the interest rate policy setting body for the Fed. Four times per year each member of the FOMC shares their Summary of Economic Projections (SEP) of which we emphasize are projections.
These are not policy decisions and to Powell’s credit he did emphasize this in his press conference but did not emphasize it enough and that was not an accident. Powell thoroughly understands the power of his words as Fed Chair including when words or emphasis is left off the table.
With this markets exploded to the upside after having already convinced themselves the Fed would be cutting rates near-term. Powell and the Fed’s reference to the SEP results threw gasoline onto the fire.
Collective market participants have convinced themselves said projections are actually policy statements and with this the Fed will be, not potentially projecting to be but literally will be cutting interest rates 3 times in 2024!
Question: What if market participants are wrong because the Fed members’ projections turn out to be wrong!?
Is this question plausible?
Let’s do a very brief timeline just in this recent price inflation era to see how clairvoyant this FOMC actually is.
In February 2021 price inflation began to display out-of-character behavior of then recent years where it easily went up through the Fed’s 2% target. By early spring the FOMC assured the citizenry it was transitory – nothing to see here. This became a drumbeat message throughout society if you recall.
Adding insult to injury, in the face of the uprising price inflation, they continued to print $120 billion per month to “support the economy” as they then deemed it necessary and continued with zero interest rate policy!
Interestingly, $40 billion of the $120 billion per month went to purchasing Mortgage Backed Securities (MBS) which further juiced the housing market which itself, like all asset markets via the cheap dollars being created was already a runaway train. Housing price inflation in particular rocketed higher and higher leaving more of the citizenry against the wall in trying to afford their housing needs and other essentials.
This while the Fed/FOMC continued to assure the citizenry the money printing was necessary the zero interest rate policy was necessary and the price inflation was transitory! Unreal but true.
For our part back in the beginning of 2021 we began to offer editions asking “what is this” type of pieces. The policies simply made no sense. Nonetheless, it was a full year before “transitory” was retired and the money printing finally ceased. By this time across-the-board price inflation was rampant!
With this how can we not question the current projections (SEP) taken as gospel by market participants?
Back in the 2021 storyline market participants celebrated the Fed’s cheap dollars while simultaneously believing their messaging that price inflation was transitory while the citizenry experienced the downside (even with their 401K’s trending).
Offered directly to the point – the Fed and markets believing in the Fed’s projections and policies can prove to be absolutely wrong. (This is but one of many historical storylines where the Fed turned out to be wrong and the citizenry lived the consequences.)
If the FOMC and their projections (SEP) current day turn out to be wrong that would bring on notable downside volatility in markets in 2024 just as collective market participants have themselves and on-lookers 100% convinced economic nirvana is coming in light of their beliefs coupled with their belief in the Fed’s SEP projections.
No price inflation, no let up in the economy, no let up in the employment market nor in market prices and of course multiple interest rate cuts – absolute perfection is the expectation and markets are pricing in this perfection. What could go wrong eh?
About Our Current Day Price Inflation
Up to current day price inflation releases continue to reflect progress and yet remain well north of 2% and in some areas price inflation growth rates are attempting to trend back upward from their general downward trajectory. To name one CPI Services is making an attempt which itself stands at 5.2% compared to a year ago – far north of the 2% target.
But as Powell suddenly offered in our aforementioned excerpt quote cutting rates before 2% is reached is looking like the operating plan. If so, let’s hope the Fed gets it right this time or else round two of “transitory” will be heading right for the citizenry.
With all of the above 2024 promises to be an interesting year and we are not so sure it will be the perfection that it is advertised to be.
What if, as one thought experiment example, the economy stays solid with solid employment gains and price inflation doesn’t relent?
If the Fed cuts rates into that scenario the markets win (on cheap dollars) and the citizenry loses (on negative wage rates adjusted for price inflation) with the onset of additional price inflation. Conversely, if they choose not to cut at all in this scenario markets lose as they will not get their expected cheap money Fed policies and the citizenry’s wage rates would be expected to remain marginally positive.
This is just one overall scenario that doesn’t go according to the currently priced in expectation. More broadly, any notable economic reality that unfolds outside of the currently priced into markets economic nirvana is surely to bring on unexpected volatility.
Buckle up for ’24 dear reader as all this elicits the old adage that when everybody thinks alike nobody thinks at all.
We wish you a Merry Christmas and a Happy New Year. See you in the New Year and thank you for your readership.
I wish you well…
Director, Market Research & Portfolio Analysis