You heard it here first.
Markets appear to be taken by surprise this morning as Federal Reserve Chairman Jerome Powell reiterated that the FOMC will do what it takes to quell inflation, even if it means economic pain. I have been saying this for months … that I believe Powell when he says such things. The recent rally in stocks has been fueled by denial … they’ve been reacting to the Fed like a Rorschach test … seeing what they want to see and hearing what they want to hear. Seizing on the most gossamer thread of evidence the battle is nearly won and that the Fed will soon back off from the fight.
It’s not completely without foundation. After all, Powell and Co. did wave the white flag at the beginning of 2019 and cave after having briefly shown some determination to normalize rates. So indeed the FOMC is paying a price for past waffling. But in 2022 consumer price inflation is far higher, and having watched and listened to Powell talk about the inflation problem, I became convinced he really means what he says. For example he has stated flatly that a stable currency is a necessary condition for all else, including sustainably healthy employment. He has also finally recognized – in vague terms (tighter financial conditions) at least – that asset prices lead consumer prices and that they must come down first.
He gets it.
Yes of course the Fed will eventually relent. But if Wall Street thinks it will happen while consumer price inflation is still near double digit territory without some kind of major financial “accident”, it’s living in La La Land.
We’re seeing early tentative evidence of a forced reality recognition … a decoupling of stocks and bonds of long duration … what Synthetic Systems has been expecting in late 2022. I’m not looking for immediate gratification … SS sees it as mostly a fourth quarter development and expecting bull’s eye timing wouldn’t be realistic anyway … but we do appear to see the fundamentals gradually falling into place.