8 Key Takeaways From Powell's Press Conference-And A Commentary
8 Key Takeaways From Powell's Press Conference-And A Commentary
We got a bigger than expected rate cut. What does that mean?
This was the most expected Fed decision since the beginning of this year.
You might have missed the conference.
Here, I compiled all the important remarks of Jerome Powell for you, with an additional commentary as to where we stand in the market cycle.
Powell’s Remarks
1. GDP grew 2.2% for the first half and it’s expected to hold this pace in the second half. The recovering supply significantly contributed to cooling inflation and helped economic growth to remain robust in the next few years.
2. Fed’s primary focus on the last two years has been bringing down the inflation which climbed well above the long term target. This is mostly achieved as PCI inflation is expected to be 2.3% this year and 2.1% next year. As inflation declined, upside risks to inflation have diminished and downside risk to employment has increased.
3. Cutting very fast may reignite inflation and being slow may risk the maintenance of economic growth. If the projections hold, the projected Fed funding rate for the end of this year is 4.4% and 3.4% for the end of 2025.
4. The Fed remains data dependent. It can hike the rates again if the inflation reignites and can cut even faster if the general economic indicators deteriorate unexpectedly.
5. Despite the recent jump in unemployment, the labor market is still strong and the Fed wants it to stay around 4%-4.4%. Fed coming up with a larger than expected cut is actually a message to the markets that the Fed won’t allow further softening in the job market. If the conditions keep deteriorating, the Fed is ready to speed up cutting.
6. The concern is not the current condition of the labor market. Unemployment was around 3.5%-3.7% in 2007 and it was an exceptionally strong job market that intensified the inflationary pressures. It’s now at 4.4% and this is also a tight job market. Participation also remains strong. It’s not about where we are right now because we are at a strong stand. It’s about the change in the course of this year. Last year, vacancy per unemployed was around 2 and it’s now around 1 and coming down. This change, more than the quality of the current state, triggered the policy change.
7. The Fed is not declaring a decisive victory against inflation. It’s basically balancing the risk now as the cooling in the job market is now more concerning than the inflation. However, if inflation is to reignite again, the Fed will respond decisively.
8. Housing inflation is the one piece that is rolling over slower than expected. However, the direction is clear and it’s going to roll over as the broader inflation remains low. The Fed is not going to take an exclusive action to specifically address housing inflation.
Commentary
As intelligent investors, we don’t attempt market timing. We look at the macroeconomic data, only to understand where we stand at in the broader economic cycle. By doing so, we adjust our positioning.
When we look at the data, we still see historically low unemployment, however, a sudden spike in unemployment in July apparently convinced the Fed that the tide is changing.
If you look at the below chart, you will see the reason.
As one reporter rightly pointed out in the press conference, when unemployment climbs above 4.6% with high interest rates, it rarely stops there.
You see in the chart that the progression of the unemployment rate since 2022 started to look much like the progression between 2006-2008, which resulted in a recession.
Though the recession in 2008 was largely triggered by the subprime mortgage crisis, it has proved extremely risky in financial markets to say “this time is different.”
It’s rather safe to take the precaution rather than relying on reasons why this time is going to be different.
Last time it was the subprime mortgage crisis, this time it may be something else. Weaker job market can surface the threats in the economy that we can’t see when we have a strong job market. In this case, the course of action is apparent: We rather try to tighten the job market and not face those threats.
Given that we already had a strong stock market, the recent cut is definitely a reason for additional optimism.
However, I don’t think this optimism is so widespread and uncontrolled as to form a bubble.
Just take a look at the credit spread:
Credit spread spikes before the recession and that spike follows historic lows. Looking at the data, we can say that such a spike was almost going to happen in 2022-2023 but it didn’t. Fed funds rate still stands at 4.8%-5%, which is still restrictive enough and won’t likely boost the risk appetite of the lenders too far.
So, overall, I think we are between optimism and excitement and I will remain cautiously aggressive. Meaning, I will avoid inflated growth names but I will be aggressive when I see quality growth at an attractive price or a good foundational stock at a fair price.
When you look at today's stock charts, there's hardly anything special. People are speaking of optimism but technically, nothing has changed for the market. A few black candlesticks here and there. The small intraday jumps didn't go over resistance.