This means further monetary policy easing and Fed rate cuts.
Here is Chair Powell's logic:
Labour Market
There exists a curious balance: supply and demand for labor are both contracting. This creates a "curious" but fragile labour market balance expressed as stable unemployment. Could flip if labor supply stabilises and demand falls. So labor market is fragile and therefore bigger risk than the raw figures imply.
Tariffs
will be one off in effect on inflation because the labour market is not robust enough to pass on increases in prices as increases in wages. And long term inflation expectations well anchored. So the inflationary risk is not seen as long-term.
Fed Policy
Therefore Fed “policy is in restrictive territory and the shifting balance of risk in labour markets "may" warrant adjusting our policy stance".
Here is where i disagree. ;
1. The risk of higher unemployment depends on labor supply stabilising and demand falling. Supply will only stabilise if President Trump stops his anti-immigrant policies. Otherwise the US only needs 80k new job a month. It doesn't need rate cuts to achieve that. And i see no sign of Trump's anti immigration polices easing off - there are 12-14 million illegals immigrants in the US. They are in the main both hard working and cheap. Terrorising them so they stop working or get thrown out of the US does not lower inflaiton it raises it because the supply side of the whole economy contracts.
2. The effect of tariffs on inflation will not be temporary. The policy goal is to replace a globaised economy with a nationalistic mercantile economy. Globalised economies are fast growth, productive and low inflation. Its US replacement is the opposite. The process of changing one economic system for the other takes years not in any time frame that can be considered temporary. And i do accept the argument that tariffs will bring loads of productive investmetn to the US raising growth and cutting inflation.
3. Current monetary conditions are not restrictive. Models which say so are based on history and that is no guide to what we are seeing in terms of economic disruption today. Moreover, the US is very close to its r* - the level of interest rates that it consistent with full employment, growth at the economy's sustainable rate and productivity as well as stable inflation . There is no reason to force interest rates lower.
What Chair Powell's newly announced policy means for investors:
- More asset bubbles in equities, crypto and non-bank credit;
- Higher inflation down the road as the money will be printed to fund it;
- Bond markets may rejoice momentarily but not for long. In one year US 30yr Treasuries will yield 6%.
- A weaker US$ based on relative interest rates with capital inflows to capture asset bubbles being US$ neutral as captial inflows will be hedged.
- The Jackson Hole monetary policy switch may allow the Fed to dodge some of the Trump administration's war against its independence. After all the FOMC will now be running with Trump Administration pack - at least in the direction of interest rates. But it will not lessen the Administrations campaign to force FOMC resignations and to fill vacancies with its own sympathisers.
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