Insights Into Jerome Powell's Interview
Liquidity is What Moves Markets
Investors worldwide pay very close attention to the Fed whenever they speak. They are searching for any inkling of a clue into future policy decisions. Ultimately, they are looking for the one thing that moves markets, and that would be liquidity.
Will they decrease interest rates? Will they add assets to their balance sheet? Will the Federal Reserve pump liquidity into the economy like they did during the pandemic or the SVB Crisis?
All of these are ways that the Fed provides money, or liquidity, to the economy. Whenever money makes its way into the economy, eventually, a lot of it will make its way into investable assets.
I should make a side note about how it is also important to watch what central banks around the world are doing. Other countries' central banks are absolutely adding to the flood of liquidity that flows into global asset markets, including the US.
Where is the Liquidity Coming From?
Currently, I can only see a couple of measures that the Fed will use in the near future that could be considered a positive when talking about liquidity. I am talking about lowering rates and slowing the selling of assets on their balance sheet.
Powell believes short-term rates will be lower than they are currently. If this is true, then the lower interest rates will allow companies and individuals to have more money or liquidity to deploy into assets markets.
Slowing the pace of balance sheet runoff off will slow this aspect of quantative tightening. This is a slight positive for certain assets that the Fed is selling. Essentually the Fed will be taking less liquidity out of the market if they slow the downward pace of the balance sheet.
Powell's Worrying Comments
Powell had positive comments on the economy. The economy is in a good place. The economy is growing. Employment is strong. The probabilities of a recession are not high at this point.
This is great news for the economy. But it is not good for prospects of a rate cuts. A strong economy will almost certainly push asset prices higher. But if too much liquidity was priced in based on high hopes of rate cuts, then it is possible to see all least some derisking to some varying degrees.
Powell suggested that short-term rates will be lower in comparison to longer-end yields. In past recessions, they did not start until the yield curves began to normalize and then steepen. As long as T-bills are at the high yields that they are, then we won't see much steepening. Once the very short-term yields start to drop, then I might start to worry.
Powells comments about the banking system were not the best. He suggested that the banking system is in a good place. But the smaller banks that have a lot of exposure to commercial real estate will sustain losses over time. Powell still maintained that the banking system is in a good place, though.
If we get another SVB crisis or any other black swan event, then perhaps the Fed will pump more money into the system.
Powell was asked if the fiscal deficit was on an unsustainable path, like Janet Yellen said herself. Powell implied that he agrees with this fact. But Powell's answer also implied that the Fed is only worried about the goals that congress has delegated to them.
Basically, Powell is saying that they do not and are not obligated to worry about the fiscal deficit. All they need to worry about is their dual mandate, price stability and full employment.
So, they will likely continue this trend of pushing up the deficit by pumping liquidity into the economy regardless of the fiscal situation. He said something along the lines of, "The fiscal problem is somebody else's problem."
What is More Worrying Than Powell's Comments?
Inflation has been the main concern for the Fed. Over the past several months, we have seen some hotter than expected inflation numbers, like PCE, CPI, etc. This is slightly concerning even though YoY inflation is clearly on a downward path.
But what is more concerning, in my opinion, is the fact that oil and fuel prices have been rising on a steady clip for several weeks. Oil is one of the biggest contributors to the price of goods and services. If this trend continues at the current pace, then I would expect inflation to persist. If nothing in the economy breaks, then prospects for rate cuts will deminish when energy prices climb too high.
Conclusion
I disagree with some of what Powell said about inflation and the economy. But it doesn't matter what I think. All we have to go off of is the data, or in this case, what Powell is saying himself. I feel like I should base my investment decisions on what Powell is saying. After all, markets are reacting as if what he is saying is true. So I will participate.
If I am going off what the Fed thinks about the economy, then I like what I heard from J. Powell. He maintained that rates will be lower in the future, the economy is growing nicely, and progress has been made on the Fed's employment and inflation goals.
The market is definitely in an overbought state on just about any timeframe, so a correction or consolidation would be logical. But based on Jarome Powell's interview, things look great for equity markets. I'm still cautiously bullish.
So what do you think? Do you believe the Fed when they say that the economy and employment are strong?
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SFRE Keith : Instead of believing the FED or not, investors should not bet against the FED and US .
MonkeyGee : This is a very good question.
if people believe the fed, then I have a 2008 story for you.
SpyderCallOP SFRE Keith: I totally agree. Don't fight the Fed. Follow the liquidity.
SpyderCallOP MonkeyGee: Haha. I know right. Anything could happen.
MonkeyGee SpyderCallOP: This time, I will have my $1 ready to buy the Lehman brother building. It's so disgusting that you can't find that information online anymore. That was a total scam.
SFRE Keith SpyderCallOP: Yes. The FED always complete it's job task.
SpyderCallOP MonkeyGee: Yup. The web, just like most all other media, is strongly censored. They don't want the cattle to know what is really going on. They gotta keep us in line.
Mynor Garcia : If you trust the FED, they got a CBDC to sell you. Oh don't worry we'll fix it, we just need total control of your money 100% of the time, trust us. When have we ever let you down.
Mynor Garcia : https://youtu.be/6OkruuMGcYg?si=eaKI6wVpxL66HXHG
SpyderCallOP Mynor Garcia: They have been talking about CBDCs for a while now. I don't like the idea of them. But personally, I don't think it will affect me that much.
But if you are someone who needs discretion with your transactions, like with shady business, then there are always ways around the system.
There are tons of cryptocurrencies that you could use, right?
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