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Fed Chairman Powell Suggests Gradual Rate Hikes Are Needed

Shock Exchange profile picture
Shock Exchange


  • Fed Chairman Powell recently informed Congress gradual rate hikes could be needed to keep the economy from overheating.
  • The Fed would also like PCE to reach 2 percent for a sustained period before hiking rates.
  • Investors should avoid financial markets until the impact of the Fed's balance sheet unwind and potential rate hikes become more clear.

Federal Reserve Chairman Jerome Powell

Last week Federal Reserve Chairman Jerome Powell submitted his semiannual monetary policy report to Congress. Mr. Powell convinced Congress the economy was not overheating, yet voiced there was still a need for gradual rate hikes. Financial markets were volatile on the strength of his comments. For the week the Dow Jones (DIA), S&P 500 (SPY) and the Nasdaq (QQQ) finished down 3%, 3%, and 2%, respectively. Below are highlights from Chairman Powell's comments and my interpretation.

Strong Jobs Growth

Chairman Powell

The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about 3/4 percentage point lower than a year earlier and the lowest level since December 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several years--that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum and for all major demographic groups.

My Interpretation

The 200,000 jobs added in January confirmed the economy is at a fever pitch. It also appears to confirm that the Federal Reserve has done its job over the past decade by helping to create a wealth effect in stocks and keeping interest rates at record low levels. Construction, leisure & hospitality were particularly strong. Construction could stall in a rising interest rate environment. Leisure and hospitality could connote that jobs serving the wealthy - big beneficiaries of the Fed's wealth effect - are areas of growth.

This article was written by

Shock Exchange profile picture
The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (9)

wald22 profile picture
Increased debt on all government levels is crowding out the private market. For most people living off of credit cards has become a lot more costly. So have loans for used houses under $100,000. The reason for this is because bundling those loans has become a lot more riskier. Higher yield is needed to compensate for that risk.

The real problem here is that banks don't lend money, they lend credit made out of thin air used as money. Borrowers need to be smart enough to take that credit they borrowed and force the bank they borrowed it from to turn it into cash before spending it. That forces them to go to the Fed and get the cash.

Borrowers need to better educate themselves and learn to create your own credit out of thin air, lend it to yourself and make the payments to yourself. That way the first payment will make the second payment and so on. To be smart enough not to make a slave out of yourself takes a little effort and knowhow. Financialization is destroying this country because most of us don't understand it. Learn to use it to help yourself to benefit yourself instead of making a slave out of yourself. There is no dignity in being a debt slave. There is a reason why most public placements come into being on the short side. Understand it.
The banks borrow money. Loans to consumer at 19% or more for credit card. Charge min payment customer never pays off debt. Fed raising rates makes customer enable to pay. Then customer goes bankrupt.
The Fed raising rates. Trump tariffs. The government pulls this bull every time we start to get ahead as working class.
We need to focus on getting the PCE to 2% first! . The Fed has been trying for 9 years. Investors are foolish to believe all this overheating economy- runaway inflation nonsense. As always, watch the long bond. If bond traders were worried about inflation they wouldn’t be buying 10-20-30 year treasuries. The long bond trader is betting on lower 10 year yields in a year or two.
Fed has itself in a bind. QE (balance sheet) is so big they'll have to turn the balance sheet reduction into an on/off mechanism depending on where the economy is going, same as interest rates. Easy in, tough getting out of QE.
wald22 profile picture
Chairman Powell fears that inflation is set to rise and knows interest rates will follow inflation no matter what he does. Thus he wants to raise rates 750 basis points before 2018 ends. So far I agree with him. But the problem is that the stock market does not make the economy. There is a disconnect between Wall Street and Main Street. On the last financial crisis, the FED bailed out the banks instead of the homeowners, and that was a mistake. The FED should have bailed out the homeowners by giving every homeowner and want to be home owner $10,000 worth of credit that we use as money that either has to be used for buying a home or make a $10,000 payment on the home, which would have went a long way to bail out the banks who caused the problem in the first place. This would have given Main Street a shot in the arm it needed to support the Main Street economy instead of the Wall Street economy. QE was used to bail out the Wall Street economy at the expense of placing debt on present and yet to be born population, most who are or will be stuck in the Main Street economy. We keep bailing out the Wall Street crooks at the expense of Main Street to a point where Main Street has lost its ability to maintain itself. Now we are borrowing just to do that.
Spicy Cajun profile picture
I understand what he is saying, but it still doesn't make any sense because investors still aren't sure what he plans to do. Does that make sense to everyone?
Iron Hamster profile picture
Janet Yellen told us we would have four rate increases, and she gave us one. I think the Fed will talk tough and do little.
Shock Exchange profile picture
Spicy Cajun,

The Shock Exchange will believe in rate hikes only when he sees them. Powell is just saber rattling.

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