CAMS Weekly View from the Corner – Week ending 12/2/2022
December 5, 2022
In recent editions we have shared numerous quotes as well as Q&A excerpts from Fed Chairman Powell whereby he has consistently emphasized the Fed is adamant about returning price inflation back to a level which will be a societal non-topic. In percentage terms his consistently referenced level is 2%. This stated target level dates back to recent decades reflecting it is an entrenched policy objective. Along the recent path of our on-going, multi-decade high price inflation level there has been the occasional speculation bandied about that perhaps the Fed was going to relinquish on this long stated price inflation objective and increase it. All through the occasional noise of said speculation Chairman Powell consistently emphasized 2% is their stated policy objective. In fact, as shared in a recent edition, at his most recent post-interest rate hike press conference on November 2nd he emphasized multiple times their stated target of 2% remains in place. In Fed-speak that means they are serious! But are they? Markets Make Opinions There is an old adage among market participants that markets make opinions. This is a broad slogan if you will but the general gist of it is if a market performs in a particular manner long enough that behavior will spill out into forming a general belief that X is actually occurring in economic reality in light of the market’s behavior. (Note: developing beliefs in light of market behavior do not always pan out into an experienced reality and also important, sometimes they do. Yes, welcome to forward looking market analytics eh.) To this adage in recent weeks the stock market has been working its way higher off the deep lows for the year. While it is always hard to offer with certainty what collective participants are seeing it appears they believe either the Fed is not really serious about bringing price inflation down to their 2% target level or they feel said price inflation will be collapsing quickly which would suffice in meeting their stated objective. This is occurring against an on-going backdrop whereby price inflation measures continue to post stubbornly high levels – far higher than 2% – while simultaneously Chairman Powell continues to reiterate the 2% stated policy objective. Hmmm. But it is in the Forecasts Updating to this past week the Fed’s favored price inflation measure – Personal Consumption Expenditure Chain Price Index (PCE) – registered 6.0%. For perspective, this measure has been in the 6% range all through 2022. The more drilled down PCE Price Index known as PCE less Food & Energy (a.k.a. “Core PCE”) registered 5.0% with last week’s update while the peak level for 2022 occurred back in February at 5.4% but the low was in July at 4.7%. So currently we are lower than the high point but yet higher than the low point for 2022. It seems safe to say progress has been made when looking at both measures with the – “kind-of-sort-of” – type of description. Also this past week market participants were anticipating a speech by Chairman Powell with a curiosity if the Fed viewed the price inflation/econ scene any differently. Speaking to the topic of various established forecasts that have been predicting the demise of price inflation he stated: “But forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways. The truth is that the path ahead for inflation remains highly uncertain.” https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm As we stand here today we can see price inflation continues to offer little in the way of meaningful downside progress which has not been lost on Fed officials. To the question of the Fed’s on-going insistence of their 2% price inflation target we can see, per the Chairman’s speech last week, their stance has not changed: “For now, let’s put aside the forecasts and look instead to the macroeconomic conditions we think we need to see to bring inflation down to 2 percent over time. For starters, we need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent. As our last post meeting statement indicates, we anticipate that ongoing increases will be appropriate.” https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm Clearly there is no letup by the Fed on their stated 2% price inflation target. Currently, via a range of price inflation measures, we see high 7% down to the 5% area depending on the measure viewed. The obvious point is 2% is far south of our current price inflation experience regardless of the measure observed. Reducing the Pace of Rate Increases Does Not Equal Imminent Rate Reductions In recent months the Fed has been increasing interest rates by ¾% at a time. It has been expected and the Chairman has agreed that at some point that pace of increase will move to say ½%. He reiterated that again on November 2nd in his post rate hike press conference while offering that the upcoming December Fed meeting will have within it a discussion of whether to start the ½% increase. In last week’s speech he also stated this yet again. When market participants here this language they run stocks higher seemingly inferring that it means rate hikes are coming to an end and then in-turn with that rate reductions will not be far behind. Chairman Powell, on this front too seems to consistently disagree via the following language voiced, yet again, as recent as last week’s speech: “The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm For our part the bottom line in this tremendous econ/market storyline is it seems the stock market is considerably out in front of the on-the-ground reality when it comes to the progress of our current rate of price inflation reduction, the current overall stance of Chairman Powell & friends at the Fed and how these two realities meet on the near-term timeline. We have stubborn price inflation with a Fed that consistently reflects it is equally stubborn in its insistence on fighting it while the stock market sends a message that one or both of these realities are not true. As offered, markets make opinions and sometimes they are correct and sometimes not. The near-term price inflation data coupled with Fed meetings will be crucial in filling in the holes as to whether stock market participants are correct or whether they will experience the advanced economics concept known as the “oh shit moment” and realize they have been seriously wrong. Next stop on this train is mid-December when we get the well known Consumer Price Index data as well as a follow-on Fed interest rate meeting. This will be interesting to put it mildly. I wish you well…
Director, Market Research & Portfolio Analysis
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