Federal Reserve chairman Jerome Powell delivered a much-anticipated speech at the Jackson Hole Economic Symposium on Friday.
That is the annual three-day event, where prominent central bankers, finance ministers, and academics from around the world discuss economic issues, implications, and policy options.
The markets were watching closely. And they didn’t like what Powell had to say.
He said that the Fed is “taking forceful and rapid steps” to fight inflation.
The Dow dropped about 1,000 points (or 3%).
But it’s what he didn’t say that interests me most. So I recorded a short video to explain my thoughts on what Powell’s speech means for the markets, the economy, and your money.
Click the image below to watch my latest video update. It’s just under seven minutes long.
And as always, I’ve also included a transcript.
Editor, Inside Wall Street with Nomi Prins
P.S. While the world watched Powell’s speech from Jackson Hole last week, the energy crisis continued to build. And one thing is sure: The coming energy shock will have huge financial repercussions for Americans this winter.
And if you own stocks… this WILL hit your portfolio.
That’s why, on Wednesday, August 31 @ 8 p.m. ET, I’m going to do a deep dive into the energy crisis… and what you can do to prepare your portfolio…
I’ll also name the five sectors I believe will go down during the energy crisis… and the five that will go up.
I urge all my readers to tune in this Wednesday night for my Running on Empty Summit. Just click here to save your spot.
Hi, everyone. Nomi here with a special update for you on the 2022 annual Jackson Hole Central Bank Economic Policy Symposium. Yes, I know, a mouthful.
The main focus was on what Federal Reserve Chairman, Jerome Powell, said about inflation and central bank policy. That’s what the markets were itching to know about.
So let me explain what he said. And more importantly, what he did not say, and what that means for you and your money in the context of The Great Distortion.
What Powell Said
One of the main takeaways that the markets focused on from his speech is that he said,
With inflation running far above 2%, and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.
The markets hated that phrase. The Dow went on to tank by 1000 points on Friday after he spoke.
But to me, that statement is relatively meaningless. I’ll tell you why. It’s because of the word “estimates,” which are themselves based on constantly changing incoming data.
Moving on from that, he also said,
Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.
This is Fed-speak for giving them maximum flexibility. That’s how those words are chosen. Things like “evolving,” “outlook,” and “data totality.”
His speech was about eight minutes. You know why it was so short?
Well, it’s because Powell only emphasized what he has already said, with a little bit of historical context thrown in for good measure, but with even less actual context than he’s used in the past.
It’s like what you do when you want to win an argument by bullying someone and not by using logic.
So what he did was he outlined three lessons from history.
The first is that he said that central banks can, and they should, take responsibility for delivering low and stable inflation.
But in his mind, his way of doing that is to crush the labor market. And also, maybe the economy, if it happens to get in the way.
Second, he used this wonky phrase from old Alan Greenspan times – “rational inattention.”
That was to try to explain that the really big danger with high inflation is not that people can’t pay their bills, like their utility bills. It’s that people get used to expecting high inflation because they’re paying attention to inflation. And it’s some sort of self-fulfilling prophecy then.
That’s why he said,
We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored.
Again, attack the economy.
Third, he said,
We will keep at it until we are confident the job is done.
The markets hated that, too. And that’s because they know that the Fed is constantly, and I mean constantly, moving goalposts around to substantiate whatever it does or doesn’t do. My book Collusion shows so many examples of that over the years.
What Powell Didn’t Say
Now, following that speech, I seriously question Powell’s grasp of economics in general.
This is a man that no American elected – none of us had a choice – who is fine sacrificing other people’s pain to secure his historical spot as king inflation-fighter.
And that’s while he’s fighting a battle in which more than half the fight is unwinnable.
That’s because the Fed cannot control the main driver of inflation today – the supply chain. As I have said before – and I’m going to say it so many times again, so please get used to it – the Fed cannot produce oil or food.
But beyond that, Powell left out so much.
He said nothing about how the Fed inflated its balance sheet from $800 billion before the financial crisis of 2008 to nearly $9 trillion during the pandemic. And that’s on top of about $41 trillion, including that, that the whole central bank community globally did.
He doesn’t seem to know that today’s unemployment rate is exactly what it was when the Fed pivoted to cutting rates in 2019.
He also didn’t use the word “recession” as a possible outcome of current policy in this particular speech. He didn’t say that U.S. GDP growth has been negative, or in technical recession, for the past two quarters.
What I Took From Powell’s Speech
So here is my main takeaway…
Commodity price inflation has absolutely zero to do with Federal Reserve or central bank policy. I think, for example, that fuel prices are going to rise into the winter. That’s based on so much data. It’s going to be worse in Europe than in the United States.
Food prices will rise as a result.
Rents will rise, because normal people cannot afford to pay higher mortgage rates to buy their homes. And that basically gives existing landlords free rein.
Now, home prices have fallen, and they may continue to fall a bit. But the people buying the most expensive homes with cash, and also the private equity and hedge funds doing the same thing, they are going to remain in control of the housing market.
Because of all of this, The Great Distortion, that gap between mortgage payments and rent, is going to grow.
Now, the markets in general are going to continue to struggle to figure out whether the Fed is incompetent, dangerous, or both.
And as I’ve also said before, the markets hate uncertainty more than they hate losing their access to cheap money.
But I still firmly believe the Fed will have to pivot. What I mean by that is this. It’s going to go through three stages of that pivot.
The first is going to be a reduction in the size of rate hikes.
The second will be a pause in rate hikes.
And the third will be rate cuts, when it becomes blatantly obvious that the Fed is killing the economy.
And each of those stages is going to bring about opportunities in our five key sectors.
The first stage could happen as soon as September 21.
[Editor’s note: This is the date of the next Federal Open Market Committee (FOMC) meeting. It is typically at these meetings that the Federal Reserve announces any interest rate or monetary policy changes.]
That’s because of Powell’s own inability to even deny that.
So I remain confident in our Great Distortion themes, which are Infrastructure, Transformative Technology, Meta-Reality, New Money, and – especially right now, because it is so key for what’s going on with inflation, the world, and the future – New Energy.
Happy investing, and I will talk to you soon.