'Don't Fight the Fed' is a time-worn adage that traders absorb from their earliest days on Wall Street.
From the towering presence of Paul Volcker to the sagely wisdom Alan Greenspan, the academic nous of Ben Bernanke and the plain-spoken assurances of Janet Yellen, past Fed chairs have held sway over U.S. equity markets -- and indeed global stocks -- for more than a generation.
None of them, however, have faced what Jerome Powell is now tasked with: executing a so-called 'soft landing' for the world's biggest economy, which is flirting with recession, while taming the fastest consumer price inflation in forty years and trimming a Fed balance sheet teetering with more than $9 trillion worth of Treasuries, mortgages and sundry debt papers mopped up by years of quantitative easing and pandemic-era spending.
Oh, yeah, I almost forgot: he needs to do all this as the U.S. heads for a bitterly partisan mid-term election cycle later this fall, characterized by record high gas prices, soaring house prices and the worst start to any year in the history of the domestic stock market.
Put mildly, it's a bit of a tricky process.
That could give the Fed a reason to slow, or even pause, the pace of its tightening, although bets on a 50 basis point hike in both June and July remain well north of 90%, according to the CME Group's FedWatch.
Minutes from the Fed's April meeting, published today at 2:00 pm Eastern time, will provide clues as to whether policymakers are sensitive to the affects of their hawkish strategy, particularly with respect to the job market, as data suggests key components of the economy are starting to show signs of rate-hike fatigue.
Sadly, despite his talents as a central banker -- and I believe he's done an excellent job at winning over a reluctant Wall Street since his 2017 nomination as Fed chair by former President Donald Trump in 2017 -- Powell suffers from what some call the first Law of Instruments: when you only have a hammer, the whole world seems like a nail.
Interest rates are the bluntest, and in many respects the least effective, tool in which to mange the current inflation surge, which is arguably the result of Covid related supply chain disruptions, geo-political tensions, Russia's war on Ukraine and the lingering effect of Trump-era tariffs on everything from steel and lumber to household appliances and solar panels.
Sure, you can hammer a screw into plywood it you want to, but it's pretty difficult to remove it once you've do so.
And yet, in Powell's change-of-heart transition from "inflation is transitory" to "we're going to fight this with everything we have", the only real policy tools we've seen deployed are rate hikes: a 50 basis point increase in May, the largest in two decades, and the promise of several more in the months to come.
The impact? Well ... stocks are sinking, with the S&P 500 riding its longest weekly losing streak since 1923, and the tech-focused Nasdaq down 30% from its recent all-time high to levels last seen in November of 2020.
Retailers, restaurants, ad-focused tech companies and carmakers are all warning of demand destruction, input cost increases, rising borrowing costs and narrower profit margins. Some are starting to either cut back on hiring or let people go.
Housing prices are soaring, with the median new home price now 20% higher than it was last year, even as mortgage rates surge past 5% for the first time since 2011.
Gas prices are topping $5 a gallon for the first time on record, with higher pump prices in some states that show no signs of abating as U.S. crude oil trades firmly past the $110 per barrel mark.
Higher rate expectations have also lifted the U.S. dollar index, which tracks the greenback against a basket of its global pees, to the highest levels in 20 years, adding yet another layer of complexity to U.S companies that generate overseas revenues.
Put another way: the Fed's aggressive rate signaling, powered by a flurry of regional Presidents and their cheering Milton Freidman 'always and everywhere a monetary phenomenon' followers in the media, have had virtually no success in slowing headline price dynamics.
They have, however, hammered stocks, blunted growth prospects and lifted the only true main street inflation hedge -- home purchases -- increasingly out of reach.
The hard truth of today's economy is that inflation simply isn't going to slow in a meaningful way until China reverses its incredibly ill-judged 'zero Covid' policy, Russia withdraws from Ukraine (and western leaders lift sanctions on its crude) and supply chains return to their pre-trade war synergies.
None of these events, of course, will be affected in any way, shape or form by Fed rate hikes.
And yet we'll keep demanding them.
