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To investors,
Federal Reserve Chairman Jerome Powell was featured in a 60 Minutes interview last night. It was the most transparent and honest that I have ever heard the Fed Chair.
The premise of the interview was stated upfront in the segment — “Jerome Powell, the chair of the Federal Reserve, may have just rescued the economy from inflation without throwing millions out of work.”
Here were some of the main takeaways from the conversation:
While it is true that the current unemployment rate of 3.7% is near a 50-year low, it is also true that the damage of high inflation has already occurred. Powell was asked whether he expects prices to come down since inflation has been falling, but he delivered the following bad news: “The prices of some things will decline, others will go up. But we don’t expect to see a decline in the overall price level. That doesn’t tend to happen in economies except in very negative circumstances.”
When asked whether the Fed had made a mistake in the Silicon Valley Bank crisis, Powell agreed that they had missed the risk analysis to the bank before the collapse occurred happened.
Powell admitted another prior mistake — not acting quickly enough when it came to increasing inflation in 2021.
When asked why the Fed is not cutting interest rates now, Powell said “We have a strong economy, growth is going on at a solid pace. The labor market is strong. 3.7% unemployment. With an economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully…we want to see more evidence that inflation is moving down to 2%…we want more confidence…I can’t overstate how important it is to restore price stability.”
Powell says “it is not likely” that a rate cut will happen in March.
When asked about the aggressive growth of the national debt, Powell said “In the long run, the US is on an unsustainable fiscal path…the debt is growing faster than the economy…effectively we are borrowing from future generations.”
When asked how politics and the Presidential election play into monetary policy decisions, Powell said “We do not consider politics in our decisions. We never do and we never will.”
When asked if inflation was dead, Powell said “I wouldn’t go quite so far as to say that - what I can say is that inflation has come down really over the past year and fairly sharply over the last 6 months. We’re making good progress. The job is not done. And we are very much committed to restoring price stability for the American public.”
I highly recommend watching the full interview. It is only 13 minutes long and Jerome Powell was in rare form. It almost felt like he was more revealing about various aspects of the Fed’s thought process as a way to combat different narratives in the market.
Specifically, it was surprising to see the Fed Chairman openly critique fiscal policy and explicitly call it out as unsustainable. Everyone knows he is right, but friendly fire is rarely exchanged in elite leadership circles — maybe Powell just doesn’t give a F*** anymore.
While most people will focus on the substance of Powell’s comments, I want to call out the form factor. It is powerful in a digitally-native world to sit for an interview like 60 Minutes and be frank / transparent. The 13 minute segment produced a plethora of viral clips all over the internet. If the goal was to get a message out to the American people, it is safe to say Jerome Powell accomplished the mission.
So what was that message?
The Federal Reserve is going to cut interest rates multiple times this year. Since the monetary policy is created and led by human decision-making, the Fed does it’s best to signal future decisions to the market in advance. Create certainty, not surprise.
It doesn’t mean that the Fed can’t change it’s mind between now and decision time, but it does mean that the communication strategy can be just as important as the actual rate decision.
Lastly, financial markets nailed this one. They have been pricing in multiple interest rate cuts for months, including the first rate cut to happen before the end of the first half of 2024. Everything Powell said last night seems to line-up with the market’s predictions.
Crowds can be full of genius or full of madness. Sometimes both. At the moment, it looks like the crowd is going to be right. The various market participants who have been aggressively allocating capital in the last few months in an attempt to front-run the Fed are going to make a lot of money too.
After listening to the interview, I have much higher confidence that the Fed will do multiple rate cuts and asset prices will begin climbing again. Remember, markets are forward looking, so some of that price appreciation has already occurred. But if 200-300 basis points of interest rate cuts are coming over the next 18 months, it is hard to see a world where stocks, real estate, and crypto are lower at the end of that timeline.
But don’t take my word as fact. There is a lot that could change in a short period of time.
Human decision-making is flawed. The Fed over-rotated on loose monetary policy. They will likely over-rotate on tight policy as well. Trying to hit a moving target with backwards looking data is nearly impossible. Powell said it himself in last night’s segment when he claimed “it is not easy to get the economics of this right.”
No one feels bad for Powell though. He is the leader of the global reserve currency. There is no room for error, nor is there an opportunity to claim the job is difficult.
Results are needed or 300+ million people suffer.
Thankfully, it seems more likely Powell and the central bank could pull off the coveted “safe landing” with each passing day. We aren’t out of the woods yet, but to have 3.7% unemployment after 11 interest rate hikes is wild.
Let’s see if the Fed can finish their magician trick in the coming months. Jerome Powell ended the interview with the following quote: “Integrity is priceless. At the end, that’s all you have. And we plan on keeping ours.”
Even though he was referring to the independence of the Federal Reserve in that comment, it highlights that history will be incredibly kind to Powell if he can get inflation down to 2% without throwing us into a recession.
Hope you all have a great day. I’ll talk to everyone tomorrow.
-Anthony Pompliano
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Fed Chairman Admits Mistakes & Predicts Economy Strength Moving Forward