Powell is not leaving
Something Different Tonight
The markets extended their post-election rally today, with major indices hitting fresh all-time highs following the Federal Reserve's decision to cut interest rates. The S&P 500 and Nasdaq closed at record levels, while the Russell 2000 saw a slight dip of 0.05% after yesterday's remarkable 5.8% surge.
In today's letter, we'll dive into the key takeaways from the FOMC meeting and share our thoughts on what this could mean for the markets going forward. We are joined by our friend
to provide you all with his thoughts. Enjoy.Powell Presser
As expected, the Fed cut short-term interest rates by 25 basis points to bring its benchmark rate down to a range of 4.5-4.75%. As usual, Chairman Powell played his cards close to his chest during his press conference, refusing to give any clues about future moves other than to say that “we’re on a path to a more neutral stance,” which means a rate that is neither stimulative nor restrictive. The consensus view is that neutral falls within a range of 3.0-3.5%. While Powell would not affirm another rate cut at the Fed’s December meeting, I am very confident that we will see another 25 basis points, given that the personal consumption expenditure (PCE) price index has already fallen to an annualized 2.1%, and the current Fed funds rate is more than 100 basis points above that level.
Powell did acknowledge that we have a very “strong economy” that has outperformed the rest of the world. Despite the decline in the rate of inflation from more than 7% to nearly 2%, as measured by the PCE, the rate of economic growth has sustained well above 2% for six consecutive quarters. The labor market is softening but remains strong with the unemployment rate near historic lows of 4.1%. Without saying so, Powell basically concluded that the economy has landed softly, which is why stocks held their gains into the close.
As for the recent rise in long-term bond yields, which some have speculated is a warning that inflation may return, Powell stated that he viewed this more as a function of a better-than-expected rate of economic growth than inflation concerns. I concur on that front.
President-elect Trump has made it known that he is no fan of Chairman Powell, but when asked if he would step down as Chairman if Trump asked him to resign, he replied with a resounding NO! Furthermore, he insisted that his or anyone else’s removal from Federal Reserve leadership positions at the President’s will is not permitted by law. He should know, as he is a lawyer.
I think he is a better Fed Chairman, and the market highly respects is acumen. While I was very critical of his delay in raising short-term rates from near zero in 2022, as the rate of inflation soared, he has been exceptional in guiding monetary policy as the rate of inflation has fallen. Ultimately, I think we will look in the rear view mirror next year and recognize that he pulled off a soft landing whereby the rate of inflation fell to the 2% target through restrictive monetary policy without resulting in a recession. I think the markets are telling us that this has already happened. I was glad to hear he has no intentions of leaving his position until his term is up and the job is complete.
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, JonETrades, Jersace,