This article will review Fed chair Powell’s latest comments on Fed policy. Powell sung a hawkish tune on November 14th even though CPI showed core inflation decelerated in October. This reminds us that the Fed isn’t data dependent like it says. The Fed is forecast dependent. If the Fed’s models show inflation will increase in the next 12 months, it will raise rates even if the recent data shows the opposite trend.
It’s usually not great to hear central bankers enthused with the economy if you’re a bullish stock investor because it means the Fed will crank up the tightening which will reduce the economic momentum. Specifically, Powell stated:
“I’m very happy about the state of the economy now. Our policy is part of the reason why our economy is in such a good place right now.”
Firstly, it’s important to point out that the fiscal stimulus has played a large role in where the economy is now. The Fed shouldn’t get the credit. The fiscal stimulus allowed the Fed to raise rates 3 times in 2018, with a potential 4th hike coming in December. If there wasn’t a fiscal stimulus, the Fed might be grappling with getting rates far enough away from the zero bound, so they can cut them during the next recession.
Housing Isn’t Affordable, So The Fed Hikes Rates?
Secondly, Powell being very happy with the economy means he sees more rate hikes coming in the next few quarters. It’s scary for stock investors because the ECRI leading index is at a 139 week low as we documented in a previous article. That’s the textbook definition of hiking rates into an economic slowdown.
The chart below visualizes that policy in a different way. It shows the percentage of people saying it’s a good time to buy a house and the Fed funds rate.
Source: Macrobond
If the housing market is about to slow because prices aren’t affordable, it could slow the economy which wouldn’t make rate hikes the best policy solution. To be clear, this cycle is different from the last one because in the previous cycle many more people had taken out variable rate mortgages which caused monthly payments to increase along with interest rates.
