We received a ton of economic data this week, but we had to wait until the end for the information that mattered most — the market’s takeaways from the Federal Reserve meeting.
Friday morning, Fed Chair Jerome Powell provided markets the pump they were waiting for — as expected — announcing no immediate tapering of asset purchases, and no plans to raise interest rates.
Shocker, I know.
But the justification was as mealy mouthed as it gets from the moment he sat down at the microphone to tell the curious story of consumer response to COVID-19.
“In a reversal of typical patterns in a downturn,” Powell said, “aggregate personal income rose rather than fell…”
Curious. Curious indeed…
He also noted that “households massively shifted their spending from services to manufactured goods,” and that “the result has been elevated inflation in durable goods — a sector that has experienced an annual inflation rate well below zero over the past quarter-century…”
Curious.
In his remarks, he said he will “focus on the Fed’s efforts to promote our maximum employment and price stability goals.”
Maximum employment and price stability, eh?
Curious.
He went on to speak out of both sides of his mouth…
“The outlook for the labor market has brightened considerably in recent months,” he said. “The unemployment rate has declined to 5.4%, a post-pandemic low, but it’s still much too high.”
The outlook for labor is improving, but unemployment is still too high…
Curious.
Then came my favorite parts…
My Takeaways From the Fed Meeting
“With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading,” he said. “While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.
“The rapid reopening of the economy has brought a sharp run-up and inflation, he continued. “Over the 12 months through July, measures of headline and core PCE inflation have run at 4.2% and 3.6%, respectively, well above our 2% longer run objective.”
But that wasn’t all…
“Inflation at these levels is, of course, a cause for concern,” he added. “But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.”
Why are those my favorite takeaways from the Fed meeting, you ask?
It’s because they’re all dead wrong!
First off, vaccines aren’t rising. The big push is over and aside from the recent come-to-Jesus moments in Alabama and Mississippi, they’re flat-to-declining until boosters become available in September.
Source: Bloomberg
Also, while the delta variant has ripped through the unvaccinated — clogging southern health care facilities along the way — it hasn’t posed much of a risk to the economy.
Source: Google
Unfazed U.S. consumers kept retail activity roughly in the same place it was all spring and summer when the delta variant was nowhere to be found.
And, finally, inflation… well, I’ll just leave this chart here.
Source: Bloomberg
As I’ve said a bazillion times, it’s not about the ridiculous peak, it’s about where it sticks.
And inflation is going to stick much higher.
My biggest takeaway from the Fed meeting is this: Everything it’s done has been wrong from the get-go.
It was wrong to ignore inflationary pressures last year.
It was wrong to use outlier data points like lumber or used cars as proof of “transitory” inflation instead of considering the broader commodity complex.
And by the time it FINALLY gets to pulling back the $120 billion per month in bond purchases sometime in Q4 or Q1 2022…
It will be cutting support into the next economic slowdown… right when we will need it again.
So if Chair Powell thinks markets will be rosy in six to nine months, I’m going to take the other side of that bet when that time comes.
All the best,
Matt Warder
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