Powell plays catch-up inflation is now the market’s problem: Morning Brief

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Monday, August 29, 2022

Today’s newsletter is from Brian Sozzieditor-in-chief and Anchor on Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and up LinkedIn.

After a little thought over the weekend after the Dow fell more than 1,000 points on Friday, I settled on something.

The Federal Reserve has historically pissed me off.

When I started out in finance as an analyst on Wall Street, I remember watching then-Fed Chairman Alan Greenspan avoid simple questions. Then I watched Greenspan disappear into the sunset after a housing crash he helped cause by keeping interest rates too low for too long. No justice was brought to Greenspan for his role in the Great Depression.

All this pissed me off.

Next up was Ben Bernanke. I dug Bernanke’s calm demeanor, but there were times when he seemed out of touch with the realities playing out in the markets during a housing crisis caused by Wall Street greed. Bernanke upsets me sometimes, but not as much as Greenspan.

Then we had Janet Yellen, who many believe raised rates too early in 2015. That was not well received at the time, and I remember being disappointed at the time. Yellen is currently Treasury Secretary, despite admitting earlier this year that she was wrong about the severity of the inflation epidemic caused by COVID.

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

This brings us to current Fed Chairman Jerome Powell, whose last mistake was misjudging inflation. Powell is now being forced to play catch up – and is hurting investor morale and damaging market confidence in the process.

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

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

  1. Fundamentally bad companies like Bed Bath & Beyond will face a much higher cost of capital at a time of need lower cost of capital. Bankruptcy risk looms for struggling companies as they grapple with Big Powell’s iron fist.

  2. Some of the busiest trades on Wall Street — namely low-interest rate-loving big-cap tech powerhouse names like Apple and Amazon — may be used as a source of capital in the coming months as investors brace for more market volatility. This sale could carry over to other parts of the market.

  3. Earnings growth is likely to slow further in 2023 as companies face higher capital costs and weakening top companies.

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

  5. As Powell hinted, expect “pain” as the Fed “sticks with it” on raising interest rates. The pain in this case could mean job losses and lower wages at a time of still high inflation.

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

To be clear, do not take this remark as a call that the Federal Reserve should be abolished. What I am saying is that there needs to be more accountability for the Federal Reserve. When they make big policy mistakes, there should be consequences — because there are consequences for the wealth of American households.

If Jerome Powell had gotten inflation right last year, the Dow probably wouldn’t have dropped 1,000-plus points on Friday. Investors probably wouldn’t be dumping stocks and pumping in cash, as some recent surveys suggest. And above all, there would be a more fertile backdrop for building wealth.

Happy Wealth Building Monday!

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