Powell Is Scaring No One on Wall Street
Cross-asset weekly advance by one measure is best of the year. Equal-weight S&P 500 rises to record as more stocks join rally.
Over two days on Capitol Hill, Powell gave no evidence he is bothered by surging asset prices, which arguably work against his goal of keeping financial conditions tight enough to wring excesses out of the economy.
While stocks ended Friday on a sour note with the S&P 500 finishing the week with a slight decline, the retreat came after a stretch where the index rose in 16 of the previous 18 weeks — a string of resilience not seen in five decades.
Its equal-weight cousin gained almost 1% over the five days.
All told, financial conditions have loosened to levels that by some measures are easier than before Powell & Co. kicked off their battle against inflation.
With all the asset gains feeding into wealth creation, it bodes well for consumer spending.
Bloomberg 8 March 2024
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How do Fed lower rates when PCE is still close to 3%, the economy is doing better than most expected, the markets literally seem to be making highs almost every other week, and unemployment is under 4%?
https://englundmacro.blogspot.com/2024/03/the-fed-is-trapped-and-everyone-knows-it.html
John Mauldin: I think rates will stay “high” for a long time.
That’s bad news if, for example, you are a highly leveraged business or you are looking for a new home. It’s also bad news for interest expense on government debt.
Not so long ago, these rates we now consider painfully high weren’t unusual.
The economy was actually better in many ways, too.
“Higher for longer” may sound scary if you have a lot of debt, but to Fed officials, it’s not necessarily so bad.
And savers/retirees love higher rates.
Because policy changes take so long (the lag effect) to show the desired effects, the Fed tends to overshoot in both directions.
They loosen too much and start inflationary booms, then tighten too much and send the economy into recession.
Those are avoidable in theory. In practice, not so much, which is why the “soft landing” scenario seemed unlikely this time two years ago.
Some serious observers to predict little or no loosening ahead. Apollo Global Management’s Torsten Slok made headlines last week by saying the Fed won’t cut rates at all in 2024.
He says it in a kind of “emperor has no clothes” way, like Wall Street simply refuses to see reality.
If you cut too soon and inflation comes back, it could seriously create stagflation, the worst of all worlds for the Fed.
If you wait too long, the economy could roll over into recession. That means you might have to cut deeper and faster than you would like.
Plus, just to make life harder, this is an election year.
You will be accused of political mischief no matter what you do.
Traditionally, you try not to make major monetary policy changes a few months before an election. If you are going to cut rates, maybe the best thing to do is cut in June and then signal a “Bostic Pause” until November.
John Mauldin 8 March 2024
https://www.mauldineconomics.com/frontlinethoughts/higher-for-longer_20240309
But what if the Fed doesn’t cut at all?
Torsten Slok, chief economist at the Apollo Group in New York, had the nerve to put his head over the parapet and predict that they won’t.
https://englundmacro.blogspot.com/2024/03/the-s-500-at-another-high-its-not-in.html
U.S. stocks may be in for rude awakening as rate cuts might not arrive until 2026
‘The main message in this paper is that to get inflation down to 2%, interest rates will have to stay higher for longer than markets currently are pricing,’ says Apollo’s Slok
MarketWatch 5 July 2023
https://englundmacro.blogspot.com/2023/07/us-stocks-may-be-in-for-rude-awakening.html
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