“The historical record strongly cautions against premature policy easing,” Powell said in his brief speech at the central bankers’ symposium in Wyoming.
But following the comments, futures prices showed only a slight easing on expectations of two rate cuts by the end of 2023. This dovish tone continued to pervade equity trading, as the Nasdaq fell another 1 percent on Monday after from its 3.9 percent drop on Friday. in reaction to Powell’s comments.
‘Decade of inflation’
Evercore ISI’s chief equity and quant strategist Julian Emanuel has warned for more than a month that “cutting rates next year is the only thing that makes potential inflation expectations unanchored.”
“This goes back to the 1970s with something we call the Burns Blunder. President Burns cut rates in the midst of that increase to fight a recession and that literally caused another decade of inflation,” Emanuel said.
He said sticking with high rates can be a good thing because it not only prevents inflation but also separates the wheat from the chaff in stock selection.
“We have all been trained Pavlovians to expect stocks to rise when the Fed cuts rates. To the extent that we remove that, you’re actually doing a service and allowing us to see the fundamentals emerge.”
Former US Treasury Secretary Larry Summers likened any early easing next year to ditching a course of prescription drugs.
“The Federal Reserve has to find a balance. When a doctor prescribes antibiotics, the worst thing you can do is stop taking them the moment you feel better. It is a mistake not to carry it out. The worst thing we can do is start to stop inflation and not do enough to slay the dragon,” Summers tweeted.
Bill Sterling, Boston-based GW Global Strategist&K Investment Management, which manages $48 billion ($70 billion) in assets, said it was also keeping an eye on Burns Blunder.
“Burns is kind of the poster child for what not to do when inflation is fast,” Sterling said.
“I think that among the members of the [Fed’s open market committee] concerns about that Burns Blunder guy are probably front and center right now.”
“[Former fed chairman] Paul Volcker tried to make sure he didn’t do the same as Burns by being more draconian with fees,” Sterling said.
Volcker in his autobiography keeping it he repeatedly notes that: “I grew increasingly frustrated by Burns’s apparent reluctance to fight inflation head-on.”
The Fed under Burns was “almost perversely willing to ease policy,” he said. “More than once I begged my old partner and friend, Fed Governor Dewey Daane, to encourage the president not to relax.”
Volcker noted that he thought “all central bankers have been congenitally reluctant to ‘take out the punchball’ and start tightening action when the inflation process is still in its infancy.”
Powell may not be so reluctant and the markets are clearly banking on that.
Another strong jobs report on Friday (Saturday AEST) could solidify markets’ view that Powell will maintain a strong monetary policy tightening stance and raise rates by 0.75 percentage point at the bank’s meeting on 20-21 of September.
JPMorgan Funds chief global strategist David Kelly believes it is likely to reach 75 basis points.
“High-frequency data suggests a strong jobs report this Friday: between 300,000 and 400,000 on payrolls. This could further tilt the betting in favor of 75 basis points,” he said.