If there were any lingering doubts the Federal Reserve intends to boost its benchmark interest rate by another quarter point next month, Chair Jerome Powell settled them last Friday.

Powell, during his speech at the annual gathering in Jackson Hole, Wyoming, hosted by the Federal Reserve Bank of Kansas City, established a clear case that our economy is ready for “normalization.”

He also provided an interesting glimpse into how the Fed makes policy decisions.

In sum, the Fed is cautious – and that reflects a level of uncertainty about outcomes of policy decisions that will create opportunities to profit.

According to Powell, the U.S. economy has strengthened substantially; that’s reflected in the fact that unemployment has declined for almost nine years and is now near a 20-year low. Most people who want a job can find one.

Meanwhile, inflation is close to the Fed’s 2% target after six years of running below that level.

And, because of fiscal stimulus, slowly rising incomes, and high levels of consumer and business confidence, Powell believes current strength will persist.

Powell noted that “navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.”

That’s a signal Powell also believes traditional methods of determining policy aren’t working today.

A particular problem the Fed is encountering is how to calculate the level of employment where rising wages begin to fuel unconstrained inflation.

The traditional “Phillips Curve” model hasn’t worked of late.

The Fed is on the horns of a dilemma.

Unemployment is far below the longer-term historical rate. So, why isn’t the Fed tightening policy more sharply to stave off an overheating economy and get in front of inflation?

At the same time, there are no definitive signs inflation is “breaking out.” So, why is the Fed tightening at all, when to do so risks job growth and economic expansion?

As Powell framed it amid the splendor of Jackson Hole, the current path of slowly but steadily tightening monetary supply policy will let the good times roll without fear of inflation.

The chair also identified longer-term, structural challenges beyond the reach of monetary policy:

  • Real wages for lower-income workers have grown too slowly in recent decades. Economic mobility has declined and is now lower than in most advanced economies.

 

  • The budget deficit is on an unsustainable path, which will become more important as a large part of the population retires.

 

  • There’s no telling when or if the economy will break out of the low-productivity mode of the last decade, which has to happen before incomes will rise meaningfully.

According to Powell, the U.S. economy is doing just fine. And the Fed will continue its current course until either the economy or inflation collapses.

At the same time, his “stars” analogy revealed that a lot of “gee, we really just don’t know for sure anymore” is happening inside the Eccles Building.

And if the Fed’s confused, you can expect more volatility, especially in the Treasury bond market.

And that’s a good thing for people who do have a rational plan.

Lance

Get Your September Issue of Boom & Bust

Harry Dent and Rodney Johnson uncover the next profitable investment … based on a boom or a bust. You'll learn why you should not be listening to the talking heads and Wall… Read More>>
Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.