Powell playing catch up on inflation is now the market’s problem: Morning Brief

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Monday, August 29, 2022

Today’s newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Upon a little bit of weekend reflection after the Dow crashed more than 1,000 points on Friday, I have come to terms with something.

The Federal Reserve has historically angered me.

When I started in finance as an analyst on Wall Street, I remember watching then-Fed chair Alan Greenspan dodge simple questions. I then watched as Greenspan vanished into the sunset after a housing crash he helped cause by keeping interest rates too low for too long. No justice rained down on Greenspan for his role in the Great Recession.

All of that angered me.

Next up was Ben Bernanke. I dug Bernanke’s calm demeanor, but there were moments he seemed detached from the realities playing out in markets during a housing crisis caused by Wall Street’s greed. Bernanke upset me sometimes, but not as much as Greenspan.

Then we had Janet Yellen, who many believe raised interest rates too soon in 2015. That wasn’t well-received at the time, and I remember being fired up in the moment. Yellen is currently Treasury Secretary, despite admitting earlier this year she was wrong about the severity of the COVID-induced inflationary outbreak.

More rewards for wrong decisions by Fed policymakers. Does it ever end?

This brings us to current Fed Chair Jerome Powell, whose latest mistake was badly misjudging inflation. Powell is being forced now to play catch up — and is damaging investor psyches and hurting market confidence in the process.

Powell playing catch up on inflation is now the market’s problem: Morning Brief

Federal Reserve Chair Jerome Powell walks with Fed Vice Chair Lael Brainard and New York Fed President John Williams during a break at the annual Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyoming, U.S., August 26, 2022. REUTERS/Ann Saphir

Here are five problems for markets I think Powell’s Jackson Hole speech caused:

  1. Fundamentally bad companies such as Bed Bath & Beyond will face much higher costs of capital at a time when they need a lower cost of capital. Queue bankruptcy risk for struggling companies as they contend with the iron fist of Big Powell.

  2. Some of the most crowded trades on Wall Street — namely big cap tech momentum names like Apple and Amazon that love a low rate backdrop — may be used as a source of funds in coming months as investors brace for more market volatility. That selling could feed through to other parts of the market.

  3. Earnings growth is likely to slow further into 2023 as companies deal with a higher cost of capital and weakening top lines.

  4. A lack of trust in what the Fed is doing could weigh on the wealth-building initiatives of households, almost freezing them in their tracks and damaging their spending plans.

  5. As Powell hinted, expect “pain” as the Fed “stays at it” with respect to raising interest rates. Pain in this case could mean job loss and lower wages at a time of still high inflation.

Put these things together, and you have a reasonable outlook for wealth destruction in part caused by a behind-the-curve Fed that still lacks accountability.

To be clear, don’t take this missive as a call that the Federal Reserve should be abolished. What I am saying is there needs to be more accountability for the Federal Reserve. When they make major policy mistakes, there should be repercussions — because there are repercussions that play out on the wealth of American households.

If Jerome Powell would have gotten it right on inflation last year, the Dow probably wouldn’t have nosedived 1,000 plus points on Friday. Investors probably wouldn’t be dumping stock and raising cash, as some recent surveys suggest. And above all else, a more fertile backdrop for wealth building would exist.

Happy Wealth Building Monday!

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