What was already a difficult task for J-Powell, who leads off Friday’s Meeting with a closely watched speech at 10 a.m., became even more complex. In addition to red-hot inflation, today’s data confirmed that the housing market is crashing faster than expected. At the same time, the U.S. service economy remains mired in deep recession, leaving the Fed chairman trapped: does he come out as hawkish and warn of a 75bps hike, making the recession even worse, or does he stay the somewhat dovish FOMC course, which however would send stocks shooting higher and undo all the financial condition tightening observed in recent months while boosting inflation further.
While nobody knows what the Fed chair will say, the one bank that probably has some clue is the one that has spawned more central bankers than any other place on earth: Goldman Sachs.
In a note published this afternoon by Goldman Sach’s economists Jan Hatzus and David Mericle, they lay out not only what Powell’s Challenge is slowing the pace without easing financial conditions but also what the former lawyer could say.
Cutting to the chase, Goldman expects Powell to reiterate the case for slowing the pace of tightening laid out in his July press conference and the July minutes released last week while also stressing that the FOMC remains committed to bringing inflation down and that policy decision at upcoming meetings including in just a few weeks in September. This will require striking a delicate balance.
Some more takes from the Goldman economists
Powell offered several reasons for slowing down in his press conference at the July FOMC meeting. He noted that 75bp hikes are substantial, that the full effect of rate hikes has not yet been felt, and that the FOMC aims to rebalance supply and demand through below-potential growth, not a recession. The July meeting minutes released last week noted that many participants saw a risk of over-tightening in a quickly changing economic environment. We sense that the Fed leadership feels strongly that it is appropriate to move at a slower pace as we advance to reduce the risk of unintentionally causing a recession. Powell will want to repeat this message at Jackson Hole.
Powell will likely balance that message with more hawkish language emphasizing the FOMC’s commitment to bringing inflation down. He is also likely to provide a balanced assessment of progress to date on the FOMC’s efforts to lower inflation without a recession. This might include noting that job openings have fallen sharply. Still, monthly hiring remains very strong, and commodity prices have dropped. Moreover, supply chain disruptions are diminishing, but underlying wage growth and inflation trends remain too high. In short, there are early signs of progress, but there is still a long way to go.
What about the risks of a dovish flip?
As the Goldman economists ask rhetorically, “would Powell risk sending a dovish message that could reinforce the easing in financial conditions that followed the July FOMC meeting shown?” In keeping with what it said previously, Goldman suspects that the Fed leadership saw the recent easing as unhelpful to its task of keeping the economy on a below-potential growth trajectory but not problematic enough to scrap its plan to slow the pace of tightening or even to refrain from discussing that plan at Jackson Hole. Much of the easing in financial conditions have reversed, and its impact is now relatively modest. Moreover, the easing has been driven entirely by a rally in the equity market that has occurred alongside a modest rise in interest rates, suggesting it is less a result of dovish Fed guidance than of premature reassurance about the inflation outlook in the equity market that Fed officials did nothing to encourage.
The economic data since the July meeting have also probably been good enough on balance to keep the original plan on track. While the July employment report was robust, the softer-than-expected CPI and PPI reports have likely kept the leadership comfortable proceeding with the intent to slow down.
In conclusion, Goldman expects the FOMC to slow the rate hikes to 50bp in September and 25bp in November and December, consistent with Powell’s endorsement of the June dots in his July press conference. That said, there is upside risk to both the near-term pace and the bank’s terminal rate forecast of 3.25-3.5% from the recent easing in financial conditions, the robust pace of hiring, and signs of stickiness in wage growth and inflation. There is a range of views on the FOMC, including support for a faster pace. If the FOMC decides to tighten more aggressively, the Fed leadership would prefer to deliver multiple 50bp rate hikes rather than another 75bp rate hike in September.
The Federal Reserve will likely deliver another super-sized interest rate hike in September. Still, according to JPMorgan Chase strategists, it could be the last of that magnitude this year as growth starts to slow.
“We expect another outsized Fed hike in September, but post that, we would look for the Fed not to surprise the markets on the hawkish side again,” they wrote.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said. “They judged inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and could remain uncomfortably high for some time.”
Stronger-than-expected data, including solid retail sales reported last week and a blowout July jobs report, could make a case for another mega-sized rate hike next month.
With no one pointing out that September is usually the worst month of the year for sales across the board. The S&P 500 has averaged a 1% loss in September—dating back to 1928—its worst month.
The stock market’s worst month—September—is approaching. This one could and very well may be particularly bad. The S&P 500 has averaged a 1% loss in September—dating back to 1928. according to Dow Jones market data. The same is true for the Dow Jones Industrial Average, dating back to 1896. Those are the worst monthly performances for both indexes in the calendar year.
That phenomenon is well known, but this year brings about heightened risks coalescing. First, the stock market has already ripped higher recently, with both indexes up double digits in percentage terms since their lowest levels of the year in mid-June. That is because markets have watched the inflation rate decline a bit. The Federal Reserve responded by noting that it will likely slow down the pace of interest-rate hikes.
The probability of a three-quarter-point interest rate hike in September has risen in the past week, with a half-point raise now seen as less likely. That is increasing borrowing costs, with rates on investment-grade and high-yield bonds moving up in the past several weeks. That threatens to slow down consumer and business spending.
One piece of good news: Some of that selling may have already begun. The Dow and S&P 500 are down in consecutive days from Friday, with the latter down about 3% in that stretch. So maybe September has come early this year.
Gold Price Would Be $150– Wells Fargo.
The U.S. dollar has been the main culprit holding gold from jumping the previous market highs this summer, which is why it’s logical that Wells Fargo still projects the precious metal to end the year above $2,000 an ounce.
Friday the 26th, we saw a large dump for precious metal ETFs across the board as markets await Federal Reserve Chair Jerome Powell’s next decision on how to fight inflation rather than ignore it. If not for the U.S. dollar index at 20-year highs, gold would be around $150 higher than its current trading levels; however, how long can the dollar hold up as high as it has with the significant amount of money Biden and the left are attempting to buy the next election with.
I’m still shocked that gold doesn’t want to move. The U.S. dollar is what’s holding gold back. Gold would have been closer to $1,900 if not for the move in the dollar. Gold is still that chameleon asset. For six months, it’s moving with accurate rates. And just when you figured that out, it’s moving with the dollar. And just when you figure that out, it’s moving with some crisis. For something so muted, it’s incredible how often the Fed and its stepson J.P. Morgan have been able to manipulate the metals markets, even getting caught spoofing the calls over the past 15 years. If you missed it on the mainstream news, don’t feel like you’ve been slipping, it wasn’t big enough news between the embarrassing Johnny Depp defamation trial or Fresh Prince slapping Chris Rock.
Wells Fargo’s year-end target remains $2,000- $2,100 an ounce. Still, if the U.S. dollar keeps surprising on the upside, that target could be unachievable.
Over the summer, the dollar has become the famous haven play as other economists struggle with more problematic inflation and growth concerns. And the U.S. dollar could hold on to its strength for the next six months, according to LaForge.
My argument supports that the U.S. will enter a recession somewhere in October or November, which will last at least until the middle of next year. Typically, the dollar loses strength when signals say we are coming out of recession. So, if our base case is correct, you could see the dollar start acting weaker in Q1 of next year in anticipation of that. Make sure to pick p metals now while the premiums are still down compared to when the pandemic first hit, yet the economics for the price point couldn’t be more bullish if we were at the PBR watching REDROCK bucking. Check us out at HTTPS:// ProsperityGold.com, Give us a call at 855-325-5235, or shop here online with us if you have any questions or need help, there will be an agent in the right lower-hand corner. May God continue to guide us on a difficult journey.
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