“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.
In very simple terms, the Fed has two mandates, price stability and full employment. Right now, they have full employment and robust business capital investments. They don’t have price stability or anything approaching it. That’s a recipe for tighter monetary conditions and higher rates until downward pressure on employment becomes problematic.
The Nasdaq-100 remains in a consistent medium-term downtrend. It is currently pulling back from the region of the 200-day MA and a sustained move back above the trend mean will be required to check potential for further downside.
The Nasdaq-100 is home to the companies which did best from the flood of liquidity unleashed over the last 14 years and the simultaneous revolution in the telecommunications industry represented by 4G. That theme is fully priced in and liquidity is now being withdrawn.
The Fed is due to double the pace of quantitative tightening next month. Every time that has been tried it has fuelled deflationary fears. The solution has invariably been a massive infusion of even more liquidity than was removed. That pattern has been the heartbeat of this secular trend and has been the reason buying the dip has worked so well.
Bitcoin, which also extended its decline today, is a high-beta liquidity barometer for this market.
The semiconductors sector remains highly cyclical. Massive investment in new manufacturing capacity tends to coincide with secular peaks for the sector.
Apple is also a highly cyclical business with a three-year replacement pattern for iPhone sales. Since the pandemic resulted in a massive boom in handset sales, it is reasonable to expect at least two lean years. The share is currently pulling back from the region of the all-time peaks.
The muted response of the Treasury market to Jay Powell’s hawkish statements today suggest the bond market is well on the way to pricing in a recession.