More mixed messages from Jerome Powell

Crux note: The Stansberry NewsWire team is all ears when the new Fed chair takes the microphone… Catch up on their coverage of this story here and here.


From Scott Garliss at the Stansberry NewsWire:

Federal Reserve chair Jerome Powell spoke this past Friday at the Economic Club of Chicago…

We have discussed the market sell-offs around his speeches. The problem has been his messaging… While Mr. Powell talks up the health of the economy, at the same time, he invariably hypes the inflation potential and spooks the markets.

This past Friday was much the same. Mr. Powell once again spoke to the health of the U.S. economy. He expressed his optimism regarding the strength of the financial system. He reiterated his stance that the labor market appeared close to full employment… He stuck to the script that maintaining the path of gradual rate hikes is in the Fed’s best interest…

And then it all went wrong…

Mr. Powell believes inflation should move up meaningfully this spring as soft data from last year fall off. He expects inflation to hit the Fed’s 2% target in the coming months before stabilizing. He discussed the potential trade war brewing with China. He said that while it’s still too early in the discussion, tariffs could place upward pressure on prices.

Later that evening, current San Francisco Fed president, and soon to be New York Fed president, John C. Williams spoke. Much like Mr. Powell, Mr. Williams talked up inflation. He expects continued interest-rate hikes through 2020. However, Mr. Williams was more direct when it came to trade wars. He stated they could slow growth and create an uptick in inflation.

The Fed’s main tool to combat inflation is interest-rate hikes. Inflation is a sign of growth. When an economy is growing, demand for goods and services rises. As demand rises, supply dwindles. As supply dwindles, scarcity increases. As scarcity increases, so do prices.

As inflation picks up, the Fed can offset by hiking rates. This raises the value of the dollar, hopefully offsetting price increases. This helps to keep the economy from overheating. However, this can also stall growth. As interest rates continue to rise, consumers are less likely to borrow. In addition, the cost of refinancing corporate debt jumps. That in turn weighs on profitability. Not the desirable growth combination for stock markets.

Given the continued upbeat economic outlook from the Fed and the prospect of a potential trade war with China, it’s easy to see why stock and bond markets are nervous. Interest-rate hikes are at least palatable in an environment where growth is rising. But if growth slows and inflation picks up due to tariff increases, rising rates could quickly stall the economy.

Let’s hope Mr. Powell is paying closer attention to trade talks than his speech would lead us to believe. Otherwise, there is potential for a double economic whammy that no one wants to see.

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