Weekly Market Commentary: September 17 – 23, 2023
He’ll “know it when he sees it”
The Federal Reserve didn’t raise rates last week but left the door open for one more rate hike in the final two meetings of 2023. This was widely expected, but markets still didn’t like Chairman Jerome Powell’s comments in his post-meeting press conference. First, he said that although a soft landing was always a “plausible outcome,” it was not his baseline expectation but a “primary objective.” Markets heard that and thought, “Hmmm. If there’s a primary objective, then there are other objectives?”
Powell then seemed to contradict himself by saying, “The best thing we can do for everyone, we believe, is to restore price stability.” Wait … what? Which is it: soft landing or price stability? Are we now in a place where the word “primary” can mean something other than being the most important thing? It seems like he should have used the word “priority” instead. Fed speak is always challenging, but messing with a basic definition is another thing.
Markets clearly didn’t like Powell’s comments. They also didn’t like the answer he gave when asked whether rates have become sufficiently restrictive and when we can expect the Fed to stop. Powell replied that he will “know it when he sees it.” How do you say we are not confident going forward without saying you are not confident going forward? With all that, how can markets be confident that we’ll only have one more rate hike and we’ll be done? If Powell is using this wishy-washy approach, when will he “know” it?
The answer is that Powell may never “see” it because he may be looking in the wrong place. If the Fed keeps pushing for 2% inflation by raising rates, it could potentially affect the economy. Powell admitted that he is not looking at volatile food and energy costs because he says they even out over time, but you cannot ignore them if they remain elevated over a prolonged period (not just a couple of months). Food, shelter and energy prices have been elevated for nearly two years. Gas prices have climbed since January 2021, food prices rose as a result of the additional cost of producing and transporting supplies to market, and the cost of buying a house shot through the roof when rates increased last year. The three basic things people need to survive — fuel, food and shelter — are all more expensive, so to ignore them is ridiculous.
We can start to get price stability by pursuing energy stability. By producing more energy and making energy less expensive, we can help make it more predictable and less volatile. Only then can manufacturers (including food producers) begin to lower prices, which will lower inflation. If we have lower inflation, the Fed could cut rates and revive the housing market. But if the Fed just keeps raising rates, the likely result is recession, job losses and higher debt costs.
The answer to lowering inflation and avoiding a painful recession rests in the reversal of our misguided domestic energy policy and not in additional rate hikes. The Fed can do little on the energy front to help lower costs, but at least it can acknowledge the role energy costs play in higher inflation. The federal government needs to change its policy to make energy more predictable and less volatile. The Fed can, however, potentially keep making things worse until the economy is driven into recession and that will certainly lower inflation. Markets predictably sold off on Powell’s lack of conviction and clarity while bond yields rose.
Auto strike or government shutdown: Which might impact the economy more?
Contract negotiations with the United Auto Workers (UAW) are at a standstill, and the UAW has decided to expand the strike. If the standoff continues, layoffs will start and probably cascade to suppliers, which will be disastrous for many communities. Eventually, supplies will dry up and prices will increase. Needless to say, the strike could have a meaningful impact on the economy, at a time when we really don’t need that type of disruption.
By contrast, here’s what First Trust had to say about federal shutdowns and the economy:
“History shows no relationship between federal shutdowns and the performance of the economy. We had two shutdowns in late 1995 and early 1996 and saw no recession either time. There was a shutdown in 2013, but no recession. There was a brief shutdown in 2018, and no recession. The most recent shutdown was the longest, 35 days from December 2018 through January 2019. You guessed it, there wasn’t a recession. The last time a shutdown coincided with a recession was in October 1990. That was only a four-day shutdown, but money was already tight and a recession was inevitable either way.
“Here’s another way to think about it: In the last 40 years, the government has been shut for 91 days. Among those days, the U.S. was in recession for four days and not in recession for 87. By contrast, in the past 40 years, the U.S. has been in recession about 8% of the time. That means the economy was more likely to be growing when the federal government was shut than when it was open!”
I hope we can find satisfactory solutions to both potential problems. But if we have to prioritize, it seems better for the economy to solve the autoworkers’ strike first.
Coming this week
Markets will still be digesting the most recent Fed meeting and trying to craft a path forward this week. Several Fed officials will speak this week, so maybe markets can glean some additional insights on where the Fed will be in the next few months.
There will be plenty of data this week, but competition from the UAW strike, the looming government shutdown and the post-Fed meeting hangover will dwarf any economic news (unless it is spectacularly good or bad).
This week’s data includes consumer confidence, Richmond Fed manufacturing, Case-Shiller and FHFA home price indexes and new home sales on Tuesday. Mortgage applications, State Street Investor Confidence Index and the Survey of Business Uncertainty will come out on Wednesday.
The third and final second-quarter gross domestic product (GDP) reading will be released Thursday, along with job claims, pending home sales and the Fed balance sheet.
Finally, on Friday, we will see personal income and spending, retail and wholesale inventories, and consumer sentiment.
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