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Tuesday, September 20, 2022
One of the Federal Reserve’s most telling statements about markets came from Chair Jerome Powell on June 15 when the central bank announced its biggest rate hike since 1994:
“Over the course of this year, financial markets have responded and have generally shown that they understand the path we’re laying out.”
When Powell said that, the S&P 500 had already fallen by more than 20% from its Jan. 4 high.
In other words, Powell all but confirmed that the 2022 market rout was exactly what he and his colleagues wanted.
If that wasn’t clear enough, Minneapolis Fed President Neel Kashkari echoed that sentiment on Aug. 29 when he said he was “happy” to see the stock market fall. That came after Powell reiterated his commitment to fight inflation — even if it meant “some pain to households and businesses.”
By the way, this isn’t the first time Powell used “pain” to describe what it might take to bring down inflation. At a Wall Street Journal event on May 17, he said: “There could be some pain involved in restoring price stability.”
To recap, inflation has been persistently high. To get prices under control, the Fed believes demand has to cool in the economy. In order to get demand to cool, the Fed is pulling the levers of interest rates to tighten financial conditions, which makes it more expensive for businesses and consumers to finance stuff. Tighter financial conditions include higher interest rates, a stronger dollar, and lower stock valuations.
This speaks to the conundrum in markets: As long as inflation is uncomfortably high, the Fed will act in ways that are unfriendly to stock prices.
And as we learned from last week’s August CPI report, inflation remains uncomfortably high.
This sets us up for this week’s FOMC meeting held on Tuesday and Wednesday. Unless the Fed unexpectedly announces a change in its approach to battling inflation, expect a hawkish announcement.
It’s possible that markets might interpret Powell’s message on Wednesday as coming off dovish, which is what happened after July’s FOMC meeting. If that’s the case, don’t be surprised to see Fed officials come out and reiterate that the Fed has a long way to go to achieve its long-run target inflation rate of 2%.
What to Watch Today
8:30 a.m. ET: Building permits, August (1.610 million expected, 1.674 million during prior month, revised to 1.685 million)
8:30 a.m. ET: Building permits, month-over-month, August (-4.8% expected, -1.3% during prior month, revised to -0.6%)
8:30 a.m. ET: Housing Starts, August (1.445 million expected, 1.446 during prior month)
8:30 a.m. ET: Housing Starts, month-over-month, August (0.3% expected, -9.6% during prior month)