Well we finally hit the month where the Federal Reserve couldn’t keep reading from the script and Chairman Jerome Powell let the cat out of the bag on inflation. When questioned about policy for the “transitory” inflation we’re still experiencing, Chairman Powell said that transitory has a lot of different meanings to people, so we should stop using that word when talking about fed policy. He then proceeded to say that the Fed sees good signs and wants to speed up tapering to hopefully be able to raise rates in the first half of next year. The markets clearly took this as the awkward breakup it sounded like and responded with a sharp selloff to end the week.
As badly as this statement came off, it is honestly a good thing to hear. Inflation has gotten totally out of control, with some estimating 20%+ inflation in some areas and the Fed seemed content to just go deeper into denial as the year went on. As good as low rates are for growth companies and consumers, they are equally bad for other parts of the economy that have been trapped in this low rate environment for far too long.
So why is a good thing causing a negative market reaction? Because how quickly the Federal reserve raises rates is also extremely important. Raise rates too slow and inflation continues to run, eroding purchasing power more quickly than wages can grow. Raise them too fast and consumers and companies can hit the brakes on borrowing which stops money from flowing into the economy. Companies also factor rates into their forecasts and forward earnings in a big way, so if the Fed does a bad job of setting expectations for these moves, it can cause companies to adjust their outlooks, which we will definitely see in stock prices. That last part is where Chairman Powell made a booboo, by surprising the market with a sudden change in thinking.
Hopefully Chairman Powell can get a little better at holding his notes in future meetings and guide the economy through a smooth tapering process for all our sakes.