Powell States Interest Rate Hikes to Continue
In under 10 minutes, Federal Reserve Chairman Powell crushed the recent stock market rally. He spoke briefly at the Jackson Hole Economic Symposium. Powell addressed the inflation that is still running at a 40-year high. He said the central bank is willing to take “forceful and rapid” steps to bring it down. The Fed will issue more aggressive interest rate hikes, even if it causes higher unemployment and a recession.
Powell acknowledged the pain interest rates will cause. “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,” he said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Powell is focused on not repeating the mistakes the Fed made in the 1970s. Yet, some economists think he is doing exactly that. They fear unchecked inflation and a stalled economy is going to land us back into 70s style stagflation. 1
The Dow responded to the comments immediately. It lost more than 1,000 points. The Nasdaq dropped almost 500 points. And the S&P 500 sank more than 140 points. Gains from the last month were all but wiped out. The extremely short-lived bull market was fueled by the hope of the Fed pivoting away from rate hikes. Powell dissolved that hope in 8 minutes.
Other areas of the economy are slowing as well. Housing is falling off rapidly. And economists predict that the current surge in hiring is ending as well.
You can expect high market volatility to come with high interest rates. Both Allianz and Raymond James investment banks are warning their clients to prepare for a wild market swings. Morgan Stanley said the market’s biggest risk is corporate earnings. Inflation and slowed growth are going to destroy profit margins and demand. Bank of America said they expected this message from the Fed. They repeated their belief that the economy is in for a hard landing, aka, a recession.
Powell said how much interest rates are increased will be based on the data it receives. The Fed is reacting to data instead of taking a lead. Wharton professor Jeremy Siegel is concerned Powell will raise rates too high. “If [Powell] waits for the official statistics to really start coming down to 2% he will overtighten and he will make the same mistake on the downside as he made on being too slow on restricting liquidity In 2021 and 2022.”2
In response to looming rate hikes, Goldman Sachs said that now is the time to buy commodities. They recommend oil and gold. Yet, there is a historical correlation of rising oil prices to rising gold prices. Gold is a traditional inflation hedge. As higher oil prices lead to increased inflation, the gold price goes up. More investors buy gold to diversify out of inflation-losing assets like bonds and cash. Gold is a highly recommended commodity as well. The Gold IRA from American Hartford Gold is an excellent way to protect your assets from rising interest rates, inflation, and recession. Contact us today to learn more.