Powell: “Couple of Years” Before Fed’s Balance Sheet is Fixed
On February 7, Federal Reserve Chairman Jerome Powell spoke with billionaire philanthropist David Rubenstein at The Economic Club of Washington, D.C., about the U.S. economic outlook and monetary policy. Rubenstein asked several questions, some jokingly, trying to get Powell to commit to timeframes, specific benchmarks, and economic numbers to predict future Fed rate decisions. As always, Powell spoke in generalities. At the end of the speech, Rubenstein joked that he didn't get Powell to say anything he didn't want. Overall, Powell’s tone was hawkish and very consistent to previous speeches promising continued rate hikes higher than market expectations and a “long way to go” fighting inflation. Watch the entire conversation here .
The Federal Reserve raised interest rates by 25 basis points (0.25%) at last week’s FOMC meeting. The jobs report came out after the FOMC meeting showing an increase of 517,000 jobs in January. Rubenstein asked multiple hypothetical questions about what the interest rate hike would have been if the FOMC had known the jobs report was going to be so strong. Powell used the opportunity to strengthen his argument for continued rate hikes.
“The labor market is strong because the economy is strong. As I said, it’s a good thing that we’ve been able to see the beginnings of disinflation without seeing the labor market weaken. It’s just that there is a lot of demand for workers. In fact, if you look at the supply of workers versus demand for workers-demand for U.S. workers is now more than 5 million greater than the available supply [sic]."
Powell argues that supply and demand will cause employers to pay more to attract workers. Low unemployment and highly paid workers are inflationary and contrary to the Fed’s attempt to destroy aggregate demand.
Rubenstein asked about the Fed balance sheet. He wanted to know the goal number. The current Fed balance sheet is $8.4 trillion, down from $9 trillion a year ago. "We are in the process of shrinking the balance sheet, passively, I should say. As Treasury securities on our balance sheet mature to a monthly cap, the net balance sheet shrinks by that amount. The same thing happens with mortgage-backed securities. The balance sheet is shrinking. As far as the target level, we haven't put a specific dollar number on it, [sic]" answered Powell. He explained that the Fed is looking for deposits at reserves banks to return to pre-pandemic levels, “it will be a couple of years before we get to that level.” When asked how long it would take to get inflation to 2%, Powell stated, "My guess is that certainly, not just this year, but next year to get close to 2%... My best guess is we will have to do more rate increases and then look around to see if we have done enough.”
What does it mean?
Powell spoke on the same day as the State of the Union. Most media outlets are analyzing the State of the Union speech from last night, so it is possible many people haven’t heard what Chairman Powell said yesterday about ongoing interest rate hikes and price instability until at least next year. There is a good reason that people missed his words yesterday, but he has been saying the same thing for nearly a year. There isn't a good reason market participants haven't taken a more defensive posture after a year of warnings and economic pain. Whether optimistic and wishful thinking, confirmation bias, or simple misunderstanding, the market has repeatedly ignored Powell’s speeches. The Fed has done what Powell consistently said the Fed would do, and the January jobs report strengthened his resolve for a more protracted fight.
Most market participants take the ostrich approach. It doesn’t want to see the facts, so it buries its head in the sand. If it doesn’t see it, it’s not happening. At the FOMC, Chairman Powell unambiguously said there would not be rate cuts this year. The market heard, "there will be one more rate hike and a cut later this year.” A few days later, the market acquiesced a little when the jobs report came out and said, "Okay. Two more rate hikes and then a cut later this year.” The market has been behaving this way since the Fed started raising rates last March. It is insanity.
Does Powell mean what he says, or is the market correct that he means something other than the literal meaning of his words? An axiom says, "Don't fight the Fed ". His track record is consistent. Everyone needs to decide what they believe and what actions are appropriate.
People can ignore Powell’s words, or they can heed them. However, my job is to warn you about storm clouds; it sure looks like more bad weather is coming. It's up to you to decide whether you want an umbrella. The warning signs are everywhere that things will be rough for a while. Powell said it would be at least next year before inflation reaches its target rate of 2%. Billionaire hedge fund manager Ray Dalio said cash is more attractive than stocks and bonds right now. Let that sink in. A billionaire who makes money selling stocks says keeping cash in a savings account is a better investment than the product he sells.
Fast forward to the end of 2023. Suppose Powell told the truth that interest rates would rise higher than market expectations for longer than the market predicted. Suppose Ray Dalio is correct that stocks and bonds won't yield a 0.30% return like a typical savings account. What will your portfolio balance be? Was it a good or bad year for your investments? How many years of retirement savings are destroyed if it was a bad year?
You don't have to be a victim. You don't have to hide your money in a savings account only to get 0.30% (the national average at the time of writing). The average gold return since 1971 has been 7.78% annually. Where would you rather have your money this year if history repeats itself? Most people don’t know that the government allows tax-free, penalty-free rollovers into precious metals IRAs. It is easy to set up, but it does need to be done correctly. We are here to help.
Call the U.S. Gold Bureau Retirement Division For Your Free and Private Consultation Today.