FRB CHAIR’S SPEECH WAS NOT A WATERSHED EVENT

FRB Chair’s much anticipated speech was not a watershed event.  Powell essentially reiterated the messaging from the last FOMC statement and Minutes.  If things evolve as expected, the Fed could start to taper asset purchases before year end.  The overnight rate is to remain at current levels for the foreseeable future, perhaps the first rise by mid-2023 according to Fed Fund futures.  There was no sense of urgency.  Most will agree Powell broke little new ground.

As noted Friday, three regional non-voting presidents offered hawkish tapering views thus the markets interpreted the speech as positive.

It appears the Fed is focused primarily on the labor markets acknowledging that its “job done” in getting inflation to where they want it.  It believes its preferred measure of inflation—the core personal consumption expenditures index—is at an apex, rising in July by 3.6% from a year earlier, the biggest gain since 1991.  Powell believes such has peaked as the rise is the result of “supply side issues.”

Commenting further about the labor markets, it remains to be seen whether Powell’s sanguine attitude toward a possible wage/price spiral is justified, especially as Friday’s personal income data revealed another 1.0% rise in aggregate wage income across the economy, taking it 5.3% above its pre-pandemic peak according to government statistics.

Even though there is a shortfall in the number of employees, the Fed chief said we are at a peak in terms of aggregate spending power.  In my view it is hard to see how there will be significant decline in the rate of inflation absent a substantial supply response.

Will such occur?  As widely noted extended unemployment benefits expire in about a week.  Dated data states 53% of people collecting these benefits are making more money not working rather than working.

I ask again will workers return to the workforce as expected?  Will aggregate income decline as suggested by Powell as these workers return and recent wage increases are not permanent?

In academia, wages or wage pressure will decline.  Reality however is often times considerably different.

The economic calendar is comprised of many top tier indicators including several sentiment surveys, the ISM Manufacturing and non-Manufacturing indices as well as several employment surveys including Friday’s release of the BLS report.  All can greatly influence the direction of trading.

Last night the foreign markets were up.  London was up 0.32%, Paris up 0.18% and Frankfurt up 0.21%.  China was up 0.54% Japan up 0.17%,  and Hang Seng up 0.52%.

The Dow should open flat.   The 10-year is unchanged at 1.31%.

 

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