DOES THE FED REALLY WANT TO KILL LABOR? | CROUCH CONNECTION | February 14th, 2023 "ADV"

DOES THE FED REALLY WANT TO KILL LABOR?

If you listen to Fed Chair Jerome Powell or any of his colleagues at the FOMC, you would think their intent is to put millions of Americans out of work in their quest to stamp out inflation. Powell recently stated that Fed economists project that the unemployment rate could reach 4.4% before they subdue inflation to an acceptable level. That translates into 1.3 million Americans losing their jobs.

WHAT ABOUT THE “DUAL MANDATE”?

Congress has given the Federal Reserve two jobs, commonly referred to as their “dual mandate”: One, to maximize employment, and second, price stability, or controlling inflation. Can the Fed ignore one of their mandates in an effort to control the other? I don’t think so.

The “Goldilocks” scenario for the Fed would be for inflation to subside as a result of the interest rate increases already instituted without causing a full-blown recession in the U.S., putting many Americans out of work. We believe that may be possible.

We have already seen signs of “disinflation” in many areas, notably gasoline prices and real estate. “Core goods” prices, which make up 22% of the CPI calculation, were up only 2.1% in December, down from 12.3% in February 2022. And Redfin reported this week that rents rose 2.4% in January, down from 15.6% in January 2022.

So why do the Fed members continue to forcefully state their intention to continue their relentless tightening?

DON’T PAY ATTENTION TO WHAT I DO. PAY ATTENTION TO WHAT I SAY

It seems the Fed members have discovered that what they say is more important than what they ultimately do. The market, with the benefit of super-computers and artificial intelligence in recent years, has reacted very quickly to Fed statements and no longer waits for the actual actions the Fed may anticipate. So naturally Fed members are using the power of the spoken word to accomplish much of what, in the past, was done with actual interest rate increases.

WHAT’S THE POINT?

The point of all the above is that if the Fed is indeed near the end of their tightening campaign, then the stock market could recover sooner than many are expecting, even though Fed comments are still extremely scary.

The bond market is signaling that the Fed has already done enough. In many years of market watching, I have learned that when long-term interest rates begin to fall, the bond market is telling us that inflation is nearing an inflection point, meaning it won’t be long before inflation begins to fall.

It is generally believed that the bond market is “smarter” than the stock market and that moves in the interest rate market need to be respected.

In fact, the interest rate on the ten-year treasury bond peaked at 4.3% on October 21st and has been dropping steadily, currently sitting at 3.5%, a big move in the bond market. As a result, mortgage rates have also fallen from slightly over 7% to slightly under 6%, at 5.99% last week.

DOES THIS EXPLAIN THE STOCK MARKET RALLY?

The explosive January rally in the stock market is telling us that the Fed may be close to the end of their disinflation effort. We tend to forget that somehow the stock market always seems to be several months ahead of the economy itself. That could be what the stock market is currently projecting, that the Fed may indeed achieve the “soft landing” that everyone would like to see…inflation subsiding without a big increase in unemployment.

This is why we always encourage investors to focus on the long run and try to ignore the current “news”. I rarely find anyone that believes that stocks will not be higher two years from now. I also haven’t found anyone anywhere who can reliably anticipate every move in the stock market, including Warren Buffet. He doesn’t even try.

Patience should pay off at times like this. We believe your patience with this market will pay off again. Call us if we can help with your concerns.

Sincerely,

Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Financial Advisor

Financial Advisor

Buffett Quote:

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Warren Buffett

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