Hello and welcome back! Thank you so much for being here today. Fed Chair Jerome Powell recently commented on the state of the economy and the potential next move for the Federal Reserve. In this article, we will discuss the main highlights of Powell’s speech and what they may mean for us. The Federal Reserve believes that the economy is still strong and the main goal is to return to a 2% inflation target. Powell emphasized the need for more interest rate hikes and restrictive policies to achieve this goal. Despite promising summer inflation data, the latest September retail data is less encouraging. Powell believes that a drop in consumption, resulting from higher interest rates, is necessary for a return to the 2% inflation target. The Federal Reserve wants to balance tightening measures to avoid causing a major downturn. Given the strong consumer demand driven by increasing consumer debt and excessive government spending, it is crucial to carefully manage interest rate increases. In my opinion, we can expect one more rate hike this year and a higher rate policy for longer next year. The question remains: is the 2% inflation target achievable and worth the risk? Treasury Secretary Janet Yellen suggests that a soft landing is possible, but it is important to consider the underlying motives behind the commitment to this target. Perhaps the government needs to attract new buyers for its debt and finance its growing deficits.
Main highlights of Jerome Powell’s speech
Powell’s commitment to restrictive policy
In his speech, Federal Reserve Chair Jerome Powell emphasized his commitment to maintaining a “sufficiently restrictive policy.” This means that the Fed will continue to implement measures aimed at slowing down the economy to prevent excessive inflation. Powell believes that this restrictive policy is necessary to achieve the Federal Reserve’s main goal of reaching a 2% inflation target.
Analysis of September retail data
Powell mentioned that while recent summer inflation data looked promising, the latest September retail data is less encouraging. Despite high credit card rates, elevated prices, and increasing consumer debt, consumers continue to spend. The September retail sales rose by 0.7% compared to the forecasted increase of 0.3%. This shows that consumers still have discretionary savings and are willing to maintain their spending habits.
Meaningful tightening in the pipeline
Powell mentioned that there may be meaningful tightening in the pipeline in order to achieve the 2% inflation target. This means that consumers may experience some hardship, including higher unemployment rates and slower wage growth. Powell believes that a drop in consumption as a result of higher interest rates is inevitable and necessary to facilitate a return to the target inflation rate.
Balancing too much versus too little tightening
The Federal Reserve wants to strike a balance between tightening monetary policy too much or too little. It is becoming increasingly clear that if the Fed raises interest rates too soon, it risks causing a major downturn in the economy. Therefore, the Fed is being cautious in its approach to ensure that the tightening measures are implemented gradually and in line with the economic conditions.
The risk of raising interest rates too soon
One of the risks associated with raising interest rates too soon is the potential negative impact on consumer demand. As consumer demand is driven by increasing levels of debt, higher interest rates can discourage borrowing and spending, which could slow down economic growth. Powell highlighted the need for careful consideration and the avoidance of premature rate hikes that may have detrimental effects on the economy.
Consumer demand driven by debt
Consumer demand in the current economic climate is largely driven by consumers taking on more and more debt. This excessive debt, coupled with elevated government spending, has been fueling inflation for months. While not raising interest rates may seem like the logical choice to support consumer spending, it also poses the risk of raising inflation at a faster rate.
The impact of government spending on inflation
Government spending has been a significant driver of inflation. Powell acknowledged that excessive government spending has contributed to rising inflation for months now. However, consumers are the ones who bear the burden of this inflationary pressure. Therefore, the Federal Reserve needs to carefully consider the balance between supporting consumer spending and addressing inflationary pressures through possible interest rate hikes.
The feasibility of the 2% inflation target
Powell reiterated the Federal Reserve’s commitment to the 2% inflation target. However, questions arise about the feasibility and realism of this target. Achieving the 2% inflation target may require significant sacrifice from consumers, such as higher unemployment rates and slower wage growth. The effectiveness and long-term implications of maintaining this target will be critical considerations for the Federal Reserve.
The government’s need to finance deficits
The government’s growing deficits require attracting new buyers for its debt. With US Treasury yields surging and a significant portion of debt maturing in the next year, it becomes increasingly challenging to find new investors. This puts pressure on the Federal Reserve to raise interest rates to attract buyers and finance the government’s deficits with more debt.
The implications for mortgage rates
Mortgage rates recently hit 8%, and with the expected fed policy, these rates are likely to inch even higher over the coming months. The market has started pricing in a 98% chance of the Federal Reserve keeping rates unchanged in its next meeting on November 1st. However, there is a 34.4% chance of a rate increase in December. These potential changes in mortgage rates will have significant implications for homeowners and prospective buyers.
Market response and future rate hikes
Market pricing of rate changes
The market has responded to Powell’s speech by pricing in a 98% chance that the Federal Reserve will keep rates unchanged in its next meeting on November 1st. This indicates the anticipation of no immediate rate hikes. However, market conditions are volatile, and these predictions can change based on economic data and other factors.
Chances of a rate increase in December
According to market pricing, there is a 34.4% chance of a rate increase in December. This implies that there is uncertainty regarding future rate hikes. The decision to raise rates will depend on various economic indicators, including inflation, employment rates, and overall economic stability.
Announcements and additional content
New channel for business and tax guidance
Lena Petrova, CPA, announced a new channel dedicated to providing guidance on business formation, taxation, and handling finances in the United States. This channel aims to help viewers navigate these complex topics and provide valuable insights and advice. Viewers are encouraged to share their questions and topics of interest to receive personalized video content.
Rumble as an alternative platform
Petrova mentioned the increasing challenges faced by certain content creators due to algorithmic changes on mainstream platforms. To mitigate these challenges, Petrova has started uploading videos on Rumble, a platform that prioritizes free speech and doesn’t impose restrictions on certain types of content. Viewers are encouraged to subscribe to Petrova’s Rumble channel to receive content that may face restrictions on other platforms.
Gratitude for nearing 200,000 subscribers
Petrova expressed her gratitude for the support of her subscribers, as the channel approaches the milestone of 200,000 subscribers. The growth of the channel is a testament to the value provided to viewers and their engagement with the content. Petrova appreciates every subscriber and is committed to delivering valuable information and insights on finance, economics, and taxation.
In conclusion, Jerome Powell’s speech highlighted the Federal Reserve’s commitment to restrictive policies to achieve the 2% inflation target. The analysis of September retail data emphasized the continuation of consumer spending despite high levels of debt. The implications of government spending on inflation and the feasibility of the 2% inflation target were also discussed. The market response and anticipation of future rate hikes were analyzed. Additionally, Petrova made announcements regarding a new channel dedicated to business and tax guidance and the availability of alternative platforms like Rumble. Lastly, Petrova expressed gratitude for the support of her subscribers as the channel nears 200,000 subscribers.