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The Next Big Fed Meeting is Right Around the Corner

CAMS Weekly View from the Corner – Week ending 1/20//2023

January 23, 2023

Mid-next week Chairman Powell and friends at the Federal Reserve will be giving an interest rate policy update via their Fed Funds rate.  The expectation is for a quarter or half percentage point increase. It will have been approximately seven weeks since their previous meeting at which time they raised by a half percentage point.  At that time, and many times previous in 2022, Chairman Powell continually emphasized their top priority, bar none, is the price inflation fight.  The Chairman laid out ad nauseam that their 2% inflation target remains in place – a target level which remains well south of our current price inflation levels regardless of the inflation measure observed.  He also shared how wage growth rates have been too high to be consistent with a 2% price inflation backdrop particularly when factoring in our current backdrop of Productivity growth rates.  We have shared in previous editions that Productivity rates have been negative which seems to have developed into a trend and is quite a negative storyline when viewed through a lens of price inflation, wealth creation, higher standards of living and overall profitability for companies at large.  Simply put, this is not a trend a nation aspires to if general prosperity is an objective.  We digress. Price Inflation Concern is More Than the Price of X Physical Good While physical goods pricing usually elicits the most attention Services pricing is also important in light of its large representation within the U.S. economy.  This category is also more obscure in light of the vast array of offerings and hence is understandably more difficult to collectively categorize for a citizen relative to general physical goods pricing. Along the path of the previous two years physical goods pricing raced upward at growth rates that we haven’t seen in generations.  Federal Reserve policy makers along with elected Officials walked right into and created a price inflation landscape via their on-going massive money printing and free money/debt financed programs all while price inflation numbers were consistently coming in hot.  Their unwavering beliefs and ad nauseam assurances that said inflation was transitory in light of supply chain disruptions in the physical goods market allowed them to walk right into an Antlion’s type trap.  A trap if you are unfamiliar that looks benign and harmless and yet invites the unsuspecting to a challenging experience. The nonsensical part of their unwavering beliefs was the endless focus on supply chain all-the-while the huge category of Services was displaying its own pricing hyperactivity.  This in conjunction with raging home prices that were not captured at all within the mainstream inflation indexes relative to what was actually happening on the home pricing front.  We shared those realities within X editions while it was unfolding and is a tributary that we will leave for another edition in order to emphasize our current focus on the larger front-and-center issue which is Services pricing remains unrelenting.  Hold the thought.

Via our red arrows pointing in every direction in the above chart we can see that Goods pricing went full rocket launch attaining price increase growth rates that we have never seen in the above which dates all the way back to the 1950’s.  By mid-year 2022 the rapid descent was in full force placing us back at the zero percent growth line current day. That’s the good news while the not-so-good news in the above storyline is when you have outsized growth in pricing which devolves to zero percent growth (as we are currently) prices remain at highly elevated levels.  Elevated at levels whereby the continual negative wage growth rates (when accounting for price inflation) left many unable to keep up with prices leaving current prices, generally speaking, beyond the reach of many.  For a true descent in prices that will take a notable negative price growth rate which if occurred, interestingly, would be met with collective deflation-deflation narratives prompting the Fed and elected Officials to go deeper into print-and-debt programs to “fight” the deflation which assures prices continue to remain elevated.  This is a succinct attempt at describing the cycle that has left general prices beyond the reach of more and more everyday citizens (think middle class evaporation) in light of the inflation adjusted wage growth rates as the cycles unfold.  Yet again, we digress – important sub thoughts though for your contemplation fellow citizen. Powell and Friends Wake up in a Big Way When “transitory” was finally thrown in the dumpster out behind the Federal Reserve building Chairman Powell zipped up his price inflation fighting suit and began relentless messaging and policy actions that spoke to such fight.  Latter 2022 the Chairman remained relentless in actions and messaging in particular with the Services price inflation issue.  Below we quote the Chairman from his spoken words at the press conference post Fed meeting in mid-December. But there’s an expectation, really, that the services inflation will not move down so quickly, so that we’ll have to stay at it, so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20221214.pdf In the above press conference the Chairman shared numerous details and views of the Fed relative to various underpinnings supporting the price growth rates and how those underpinnings will need to ease in order to expect to see Services price growth rates retrace meaningfully.  To date, as a general statement, those underpinnings have remained solid which is to say they have not eased much.  With this, to current updated data, Services pricing has not only remained strong but set a new high in its trend.

To highlight this trend the above is a 5 year view rather than the multi-decade view in the previous chart. Unlike the previous chart the above reflects Services pricing trends remain strong and intact. In fact with the most recent release we saw a 7.5% year-over-year growth rate while the previous high mark within this trend was back in September at 7.3%. No let up in trend. Are Collective Market Participants Taking Powell Seriously? Come next week we will find out if Chairman Powell is still serious about the general price inflation fight and more particularly the Services price inflation trend. If he remains steadfast will collective participants continue to doubt his actions and messaging and with this continue to be convinced that rate hikes are about done and the price inflation issue is, well, a non-issue? If we have digested the collective narrative properly that seems to be the message and also seems to be seriously at odds with the Chairman’s on-going messaging as well as the overall price inflation data. This upcoming interest rate policy meeting certainly will be quite interesting in conjunction with collective participants market pricing as follow-on days unfold. We will share details of the Chairman’s actions and messaging accordingly. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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