To hear Jeremy Siegel tell it, the Federal Reserve has already won its fight over inflation and should start taking its foot off the monetary brakes.
“I think the Fed should be near the end of its tightening cycle,” the ubiquitous market prognosticator and Wharton School finance professor told CNBC last week. According to Siegel, current headline inflation may still be high, “but forward-looking inflation has really been stopped. And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure” on inflation.
Is he right, or is it just wishful thinking so stocks can resume their decade-long winning streak?
Right now the signals look mixed, based on the two most important and widely-followed economic reports issued last week.
According to the Commerce Department, second quarter GDP fell 0.9% at an annual rate, on top of the prior quarter’s 1.6% decline.
Until this year, the mainstream media would have immediately pounced on that as clear evidence that we are officially in a recession, following the traditional definition of a downturn as two back-to-back negative quarters. Now, however, with a feckless president poised to lead his party to an election Armageddon in November, we learn that the old standard simply doesn’t apply anymore, so we can’t use the dreaded “R” word.
Whether that’s pure bias or pure something else that also begins with a B, July’s robust jobs report, which showed the economy added a much higher than expected 528,000 jobs, does create some doubt whether we are in a recession or not, and if so, what the Fed plans to do about it.
Instead of viewing the jobs report as good news being bad news – i.e., the Fed will need to continue tightening to stifle economic growth—and sell stocks, the market instead went up on Friday and continued to rally on Monday morning. Is the recession – if there ever was one – now officially over, the inflation monster slain and no further need for the Fed to continue to raise interest rates?
Not according to at least one Fed official. Noting that the Fed raised interest rates by a steeper-than-expected 75 basis points at both its June and July meetings, Fed governor Michelle Bowman told the Kansas Bankers Association over the weekend that “similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful and lasting way.”
“Our primary challenge is to get inflation under control,” she said.
The Fed doesn’t meet again until September 20-21, which means a lot of economic statistics are going to come in in the meantime. Depending on what those figures reveal, will the Fed revert to its “data dependent” monetary policy stance, or will it stick with its new “forward guidance” policy and keep raising rates regardless of what the numbers show?
If stock market sentiment is any clue, Professor Siegel may be onto something.
Since mid-June, the S&P 500 is up more than 13% and the beaten down NASDAQ is up over 18%. Of course, that could simply be a short-term, bottom-fishing rally that almost always appears during bear markets, sometimes for extended periods (like this one).
Should we take that to mean that the Fed is willing to at least wait and see what happens with inflation before it raises interest rates again in September? Or has it already made up its mind what it wants to do?
It seems overly optimistic to believe that nearly 14 years of massive monetary and fiscal stimulus that inflated the price of goods, services and assets could be unwound after a couple of relatively modest Fed interest rate hikes, with almost no similar restraint on spending by Congress.
Can inflation really go away that quickly? Can you get instant relief from a ferocious hangover by popping a couple of Advils?
Of course, this is something that a lot of other investors would dearly love to believe, but it just seems too painless. But others would argue that we have in fact suffered a lot of financial pain, and that it’s time for the good times to start rolling again. After all, including its latest rally, the S&P 500 is down 13% from its all-time high last December, while NASDAQ is still off by more than 21%.
However, those losses seem too modest compared to previous bear market drops. For example, the S&P plunged more than 50% during the 2008 global financial crisis, a period preceded by reckless regulatory stimulus that ignited the housing crash.
Should we therefore expect more pain to come, or will the next month’s economic statistics show that we’re just fine—inflation is coming down, more and more people are getting hired, and economic growth is only being modestly impacted?
It will be interesting to watch what happens between now and the next Fed meeting. But I would keep my guard up.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.