Have you ever decided to prune back a beautiful bush or tree that you have enjoyed? It can be tough to judge how much to cut back because you want to help it and not hurt it. Well, it appears to me that is the difference in opinion roiling the markets right now with Fed Chair Powell.
We experienced a modest pullback in inflation in July and the markets were elated with a nice run-up. Fed Chair Powell wants to see more than one month’s worth of inflation dipping. Just as a pruning judgment might differ between one inch or three inches of cutback, the market’s reaction has been negative to Powell’s decision to keep on pruning. Powell, on the other hand, is no shrinking violet (to continue having fun with this pun), and made it clear the market’s opinion does not guide him.
Just as you won’t know until the following year if your pruning efforts were fruitful, the economy will likely have to go through a slowdown before picking up speed again. Powell remarked, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”.1
I am already hearing optimism about this economic pain being worth it in that commentary is already anticipating a resumption of the ‘Roaring 20’s’ economy by 2024. Did you know new businesses are forming at a 50% higher rate than what was occurring pre-pandemic2? Analysts are projecting those new businesses will be ready to do robust hiring by 2024, positioning the US economy for an even healthier and stronger resumption of growth. No pain, no gain?
1Bloomberg, 8/26/22: Powell Talks Tough, Warning Rates Are Going to Stay High for Some Time
2 UBS, 8/29/22: Stocks Decline on No Fed Pivot
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