While Fed Chair Jay Powell has stuck to his hawkish “inflation will be crushed” talking points of late, financial markets seem curiously optimistic ahead of the cash open of the New York exchanges.
France’s CAC 40 added 0.7% in early trading to 6,168.33, while Germany’s DAX gained 0.9% to 13,014.33. Britain’s FTSE 100 rose nearly 1.1% to 7,338.96. U.S. shares were set to move higher with Dow futures up 0.4% at 31,902.00. S&P 500 futures rose 0.5% to 4,025.50. Oil prices rose.
At the same time, the dollar dropped against the yuan, the euro, and the pound sterling, although recoveries do appear to be on the way.
With the BLS due to release August’s inflation numbers early next week, are the markets pricing in an expectation of a significant drop in consumer price inflation?
The market optimism derives from it agreeing with your other post. Namely that Powell et al are lost in the weeds. That means a "pivot" is coming soon.
That is a possibility, although my suspicion is that the markets are likely to have their hopes dashed again.
The reality of Powell's playbook is that it is fundamentally wrong: interest rates are problematic as a tool for fighting inflation, particularly when there are ongoing supply shocks. The belief that they are a mainstay for fighting inflation stems from a likely misread of the Volcker Recession as a means for ending the stagflation of the 1970s.
One of the more fascinating aspects of the Volcker recession is that Volcker raised interest rates to their maximum AFTER inflation had already started trending down, which suggests the rise was not at all necessary--and therefore the interest rates themselves played a much smaller role in ending the inflation of the 1970s than the history books are wont to show.
It's also important to note that the stagflation of the 1970s was driven in large measure by two wholly non-monetary supply shocks: the 1973 OPEC oil embargo and the 1978-1979 Islamic revolution in Iran, both of which spiked oil prices.
Within three years of the US emerging from the Volcker Recession, oil markets collapsed amid a supply glut, as the shortages and perceived shortages from the late 70s reversed.
This could again suggest that Volcker's interest rate hikes were considerably LESS influential than the historical narrative presumes--and that means Powell has backed himself into a corner: Unlike Volcker, he will not get a reprieve from the coming slew of exogenous supply shocks, which are likely to push prices up no matter what he does with interest rates.
The markets are pinning their hopes on a return of the "dovish" Powell from before. There is a real possibility that "dovish" Powell can't return, because the world will simply not allow it. The more the world economy and geopolitical situation destabilizes, the less likely Powell will have the maneuvering room to ease up on rate hikes.
The market optimism derives from it agreeing with your other post. Namely that Powell et al are lost in the weeds. That means a "pivot" is coming soon.
That is a possibility, although my suspicion is that the markets are likely to have their hopes dashed again.
The reality of Powell's playbook is that it is fundamentally wrong: interest rates are problematic as a tool for fighting inflation, particularly when there are ongoing supply shocks. The belief that they are a mainstay for fighting inflation stems from a likely misread of the Volcker Recession as a means for ending the stagflation of the 1970s.
One of the more fascinating aspects of the Volcker recession is that Volcker raised interest rates to their maximum AFTER inflation had already started trending down, which suggests the rise was not at all necessary--and therefore the interest rates themselves played a much smaller role in ending the inflation of the 1970s than the history books are wont to show.
It's also important to note that the stagflation of the 1970s was driven in large measure by two wholly non-monetary supply shocks: the 1973 OPEC oil embargo and the 1978-1979 Islamic revolution in Iran, both of which spiked oil prices.
Within three years of the US emerging from the Volcker Recession, oil markets collapsed amid a supply glut, as the shortages and perceived shortages from the late 70s reversed.
This could again suggest that Volcker's interest rate hikes were considerably LESS influential than the historical narrative presumes--and that means Powell has backed himself into a corner: Unlike Volcker, he will not get a reprieve from the coming slew of exogenous supply shocks, which are likely to push prices up no matter what he does with interest rates.
The markets are pinning their hopes on a return of the "dovish" Powell from before. There is a real possibility that "dovish" Powell can't return, because the world will simply not allow it. The more the world economy and geopolitical situation destabilizes, the less likely Powell will have the maneuvering room to ease up on rate hikes.