Markets Tank While I’m Waiting for the “Powell-Was-Dovish” Tightening-Deniers to Fan Out and Clean Up this Mess

Powell quotes Volcker, promises to “use our tools forcefully,” take “forceful and rapid steps” to reduce demand “until we are confident the job is done,” though it will bring “pain to households and businesses,” but not doing it will cause “far greater pain.” Hawk city. Finally got through to the markets?

By Wolf Richter for WOLF STREET.

Fed Chair Jerome Powell, in his to-the-point speech today at the economic policy symposium in Jackson Hole, appears to have attempted to pull the rug out from under the tightening-deniers that had been fanning out across the internet, the social media, and the TV circuits over the past few months, with their contorted theories of “pivot” and “rate cuts” and “dovish Fed” or whatever.

These tightening-deniers ranged from hedge-fund managers with a big Twitter presence and research gurus at financial institutions to countless folks trolling comment sections around the internet and the social media. They cobbled together messages based on fragments from the past two FOMC meetings to show that the Fed – despite what the Fed actually said – would soon “pause” the rate hikes or “pivot” to rate cuts, even though the Fed had raised its policy rates four times this year, including twice by 75 basis points, the biggest rate hikes in some of these folks’ lives.

The effect of this widespread high-energy tightening-denier campaign was that financial markets pivoted in mid-June and did the opposite of what the Fed wanted them to do. The Fed relies on the financial markets to transmit its monetary policies to the financial conditions, to tighten them, so that these tighter financial conditions would begin to slow down demand, and thereby remove some of the fuel under inflation.

What these tightening-deniers accomplished instead was that financial conditions loosened since mid-June, with yields falling, spreads narrowing, and stock prices surging in a massive summer rally, which lasted about two months and peaked in mid-August.

But in mid-August, markets did their own pivot, yield rose again, financial conditions tightened a little, and stocks came down some.

And today Powell, in clear and precise language that would be hard to twist into anything different, pulled the rug out from under the remaining tightening-deniers. It was just hawk city.

For the Fed’s monetary policies to have any effect, markets must transmit them via the financial conditions to the actual economy. And the Fed needs to make sure this happens. And today was an effort by Powell to get this job done.

It worked for now. Markets began to absorb the message that Powell was hammering into them: Stocks fell hard and broadly, with the S&P 500 index down 3.4% today, and the Nasdaq Composite down 3.9%, the Dow down over 1,000 points.

Powell invoked three times Paul Volcker, who became legendary as Fed chair by finally cracking down so hard on massive inflation that it triggered the double-dip recession but created decades of falling and relatively low inflation, that have now been squandered.

He quoted Volcker directly, at the height of the Great Inflation in 1979: “Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.”

Powell said that the Fed’s current crackdown on inflation will create “softer labor market conditions,” and “will also bring some pain to households and businesses.”

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said.

His speech was a series of hawkish comments that boil down to this: We’re going to crack down on inflation, and we’re going to “use our tools forcefully” and we’ll take “forceful and rapid steps,” to bring down demand, and there won’t be any “stop” or “pause” in the rake hikes until rates are “sufficiently restrictive” to “return inflation to our 2 percent goal.”

So now I’m waiting for the geniuses at the tightening-denier camp to figure out a way to twist this into “Powell was dovish,” which would be a hoot.

Powell in his own words.

Below are key excerpts of Powell’s speech; they’re finely crafted and fun to read, and some of them are specifically targeting the tightening-deniers (entire speech is here):

“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.

“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.

“The burdens of high inflation fall heaviest on those who are least able to bear them.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.

“Reducing inflation is likely to require a sustained period of below-trend growth.

“Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

“While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent.

“In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.

“July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.

“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases [which addresses how tightening-deniers had twisted his words last time: so after September, there will be more rate hikes, but not every rate hike will be 75 basis points].

“Restoring price stability will likely require maintaining a restrictive policy stance for some time.

“The historical record cautions strongly against prematurely loosening policy.

“Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century.

“In particular, we are drawing on three important lessons.

“The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.

“Our responsibility to deliver price stability is unconditional.

“It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand.

“None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability.

“There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

“The second lesson is that the public’s expectations about future inflation can play an important role in setting the path of inflation over time.

“If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will.

“Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions.

“As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, ‘Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.’

“Of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

“That brings me to the third lesson, which is that we must keep at it until the job is done.

“History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting.

“The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

“These lessons are guiding us as we use our tools to bring inflation down.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”

Yup, so let’s see how long it will take for the tightening-deniers to come out and twist this around.

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  396 comments for “Markets Tank While I’m Waiting for the “Powell-Was-Dovish” Tightening-Deniers to Fan Out and Clean Up this Mess

  1. Depth Charge says:

    Powell just gutted the “pivot people” with a rusty shank.

    • Wolf Richter says:

      Depth Charge,

      You sure have a way with words 🤣

      • Depth Charge says:

        Why thank you. Hard to find anything in that speech which those imbecilic deniers could hang their hats on.

        • Cas127 says:

          Golly, why would anyone possibly doubt the Fed’s steadfast commitment to higher interest rates after it has spent the last 20 years destroying them?

          I’m not a “denier” – I have no specific read as to what the Fed will actually do in the short term (as opposed to *talking about* doing…) but I also haven’t been mind wiped of the Fed’s actual behavior over the last 7000+ days (minus 150 lately and a few hundred more here and there).

          And…if the G *really* wanted to punctuate its “commitment”…he could have announced a 50 bps surprise hike (instead of letting the Board of Governors go get a tan for two uninterrupted months).

          Everybody in the US has long since learned to only pay attention to what the G *does* – as opposed to what it *talks about* doing.

          (Set B is much, much, much bigger and rosier than Set A).

        • max says:

          “I’m from the government, and I’m here to help you . . . and it won’t cost you a penny.”

          “Watch what we do, not what we say,”

          “By their fruits you will easily recognize them.”

          FED is entity which creates inflation in the first place — there is a point, where there is too many addicts, to stop it –are we there yet –no one knows.

          the FED’s policy options: (1) more inflation, (2) more blarney, (3) more accounting fraud.

          Expect business as usual.

        • GringoGreg says:

          Will take much higher rates for longer to stop the inflationary debt printing of trillions$$$ and debt forgiveness(student loans) of the Fed and State gvts to curtail inflation! As the economy, fed and state budgets swirl the drain politics will force banana-republic Jerome to show his true feathers of a dove!

        • Old school says:

          I am not a denier, but there is definitely another side to the pivot argument. Extreme debt levels and negative real rates make the economy very vulnerable to rate increases. Probably economy will implode with 1% real rate.

          The weakest companies, pension funds and countries will begin to implode first. Going to be a disaster in parts of Europe this winter unless there are some changes made quickly.

        • Ian says:

          Cas127. Agreed, they are talking a good line at the moment but it is difficult to assign much credibility to the same organisation that seemed to be going out of their way to create the inflation in the first place.

      • NBay says:

        Enjoy a good gloat, it’s been a long time coming.

        Now we just have to spread the pain democratically;

        E.g., No mistaking mere financial or convenience pain for real physical pain.

        • Winston says:

          “Now we just have to spread the pain democratically”

          LOL! Considering the income transfer that’s already occurred, lost interest income for SAVERS as just one example, that will have to be very unfair, compensating in a downward direction. But, of course, that will never happen.

        • NBay says:

          Read the Gettysburg Address……Lincoln saw EXTREME wealth inequality coming…..but still hoped the Republic could be saved after that bloodbath….it could still happen.

      • rankinfile says:

        I’m still waiting for dramatic balance sheet reduction by the Fed,the ECB,and Japan.
        Get the balance sheet down to $4 Trillion then talk to me about stocks or gold.

    • M C says:

      I think Powell has been a different guy since the threesome lunch he had with Biden and Yellen. He was given his orders and top cover for destroying inflation by destroying the stock market /economy.

      Which Biden continues to frustrate.

      Dems should recall what happened to Bush the First. It’s about the economy stupid.

      • SS says:

        A lot of good “Words”, however, clearlylacking the depth that would show true grit.

        Powell must directly state that he will raise till real interest rates (Fed fund rate – Interest) become positive from todays -6%.

        He must put forward a plan to prioritize production increase over consumption decrease.

        He must state how he plans to address tantrums: Keep financial system up as Assests decline making companies insolvent and bankrupt.

        • Gattopardo says:

          Dude, it’s not -6%. You’re looking at year ago prices for your base. Current inflation is around 4-6% depending which index you prefer.


        • SS says:

          Oh, you mean it’s “transitory”!

        • JeffD says:

          Bostic had a great interview right before Powell spoke where he addressed this. He said that no one is going to make new investment in an environment where growth is going to slow. But the great thing about the interview is that he used that “dovish” remark to re-emphasize that inflation has to be brought down *quickly* so companies once again can plan for a future where they can see growth as part of the picture rather than ongoing corrosive inflation.

        • Flea says:

          Gattardo are you kidding hamburger at grocery store 6$ a pound you truly are mistaken ,now it’s just spaghetti and sauce . Yo be replaced by just spaghetti. then to be replaced by just water

        • The Real Tony says:

          The odds of that ever happening are zilch. All variables point to runaway inflation then hyperinflation.

        • Gattopardo says:

          Flea, with that sentence construction I’m not sure what you’re saying. But I’ll take a stab. YES I am serious. Look at the month to month inflation levels. From May to June, June to July, the annualized rate of inflation is approaching “normal” (which, BTW, I still hate, because in Gatto World it should be 0%, not 2%).

          Some of you guys don’t get it. The inflation, the increase in prices has ALREADY happened. Those prices are here to stay. Stop looking at year ago prices for your inflation calc, because the Fed is not going to push prices back down, ever.

          ALL that matters now is how fast they let FUTURE prices go. Currently, it looks like the price increases have slowed way down. Inflation is NOT running CURRENTLY at 8% FFS.

          Finally, I am not covering for the Fed. I am pissed as hell about these price levels. I’m merely trying to get you guys to understand the reality of the situation.

        • SocalJohn says:

          Gatto, taking derivatives over short time intervals in noisy data doesn’t work.

        • rankinfile says:

          The thing to watch isn’t interest rates,it’s balance sheet reduction.

        • Gattopardo says:

          SoCalJohn, fair point re: short term data points. Looking back a year, though, is even worse. Looking at the series of data points is likely best, and the trend is already clearly way down.

          Again, I’m not pimping for a pivot or low rates. Just trying to stop this ridiculous “we’ve got -6% real rates STILL!” b.s. We don’t. Depending on your favorite measure of inflation, and what you do or don’t exclude (like volatile fuel/food), we’re approaching something more like a still totally unacceptable -1% or -2%. Of course, these measures could come in hot for Aug, and trip that up a little.

        • gametv says:

          Gatto – I am with you on this one. The factors that caused a surge in inflation were increased demand from stimulus payments and decreased supply from COVID restrictions and certain industrial limits, like chips.

          The supply constraints are almost gone. There is a report by an investment bank that says chip shortages will be sorted out in the next six months for the auto industry.

          So then we have demand issues. Bank balances are falling back toward normal and credit card balances are rising back to normal. The other aspect of increased demand is higher home prices, which make people feel rich. Within six months, the demand equation is back to normal, or maybe even substantially worse than normal.

          Falling home prices will be the final nail in the coffin. But we need to see them fall for at least six consecutive months, so that people stop believing they will bounce back to bubble levels.

          So in six more months, this inflation will just vanish. I am hoping there is a period of deflation and the Fed allows that to happen to get prices back down.

          The final issue is whether we get into conflict with China. That would be a huge disruption to the economy, if it happens.

          Inflation is nowhere as sticky as it was in the past, primarily due to the internet. Digital commerce will continue to drive price transparency in MOST industries.

        • phillip jeffreys says:

          Disagree GameTV.

          Next agricultural planting cycle comes in Sep. Watch what happens as energy policies continue to exacerbate that sector.

          NG prices continue upward march – with implications for all secondary/co-products. Winter is around the corner.

          Fiscal policy continues trend of spending like crazy sailors.

          Without venturing into political advocacy, it is clear that the domestic temperature is increasing in a very high stakes game for all sides.

        • JeffD says:

          @Gattopardo, Then why are England’s inflation rates projected to be 20% next year? We live in a global economy with global supply chains where half of everything is outsourced, so to say inflation has “stopped” in the US while it rages in the rest of the world is just plain wrong.

      • Michael says:

        No, M C

        It’s about Generations. The FED is “directly” responsible for this 2nd housing bubble essentially locking-out a whole generation of Americans from buying a home.

        He is sacrificing the stock market while he brings housing back to normalcy.

        It’s about future Americans, stupid.

        • Winston says:

          You seem to think that the Fed has such fine control to be able to specifically do that without causing much harm in other areas – property tax receipts as one example.

          From a very nifty interactive graph:

          Home price / median annual income

          1974: 4.09
          1985: 4.11
          1998: 4.04
          2005: 7.00 (peak of housing bubble 1)
          2022: 8:13

          So, either home prices will need to come down 50% or wages will need to come up 25% and home prices down 25% to put homes back in the traditionally affordable range.

          If you think that’s gonna’ happen, I have an investment in a crumbling Chinese ghost city apartment block I’d love to sell you.

          The Fed has a set of crude tools to centrally plan (and we know how well THAT usually works) the economy via simplistic garbage economic models, so anything they do is basically a Hail Mary pass.

        • HowNow says:

          Housing: I just listened to a talk by Robt. Shiller, c. 2009. In it he described how, in 2005, when he was revising his “Irrational Exuberance” book, he predicted that a housing bubble was underway and that there could be a collapse of financial markets due to irresponsible lending and financial loan packaging.
          He reviewed Fed papers, looking for mention of this growing problem and only found a single report on it. He contacted the Fed analyst who walked-back his suggestion of a bubble, saying that they have to be careful about what they report.
          I honestly think that a child, in 2002, if they lived in California, would have recognized that a housing bubble was being inflated. Why the Fed blew two of these up, ignoring them until they became grotesque, is beyond my imagination.

        • HowNow says:

          In short, I do not think the FED knows what it is doing.

        • Gabe says:

          You nailed it. Gen Z is a benefactor for a reason! USA needs lower housing costs so Gen Z is comfortable producing more worker bees. Step back to see the bigger picture and it becomes obvious.

        • HowNow says:

          Winston, you may want to send a copy of that nifty graph to Jerome Powell. JP and the whole Fed entourage may have never seen something like that.

        • gametv says:

          There are two differences between the last housing bubble and this one. First, there is alot more equity and a lack of sellers who are under financial duress. So sellers will be slow to reduce prices. But on the other hand, the affordability of homes based on monthly payment is far worse this time than last.

          Last time, the Fed cut interest rates to stimulate demand. This time, it will be difficult to justify really low interest rates, even if inflation falls. So I just dont see home prices finding a bid from buyers until a much lower price.

          But there are some suckers who will buy homes at a small discount from the peak and think they got a good deal. Many of those will lose every penny of their down payment.

          If banks were required to hold the mortgages they originate, we would not have this situation. They would require 40% upfront for purchases being made right now.

        • phillip jeffreys says:

          Too many conflicting fiscal and monetary actions in play. Add in global churn on the supply side, climate change driven energy constraints and likely assaults on the dollar as reserve currency – it just doesn’t add up in the aggregate.

      • Seen it all before, Bob says:

        Good things keep coming for poor and middle who are the employed ($20+/hour!), educated (bailouts on loans), and have only little in the stock market (because they had no money).

        Huge change from the 100+% gains in stocks which are owned by a few that occurred the last few years. The poor retirees get their SS raise. The rich retirees have to cut back demand or go back to work to relieve the employment crisis.

        Is it helping reduce inflation? Maybe, since the people in the last category still have too much excess money to drive up demand. If only they’d believe Powell and stop all of this extravagant spending.

        • Wisdom Seeker says:

          The inflationary extra spending won’t stop until QT bites a bit deeper into the bloated credit supply…

        • phillip jeffreys says:

          Stocks are not just owned by the few. Anecdotal, of course, but I can’t tell you the number of every day middle class folks I know who were walked into placing their savings into index funds.

          While crushing demand (i.e., causing slowdown/recession) sufficiently will eventually result in arresting inflation (assuming a wage/price spiral doesn’t develop in parallel (i.e., stagflation), none of this accounts for what is happening on the supply side, specifically energy.

        • Davinsky says:

          Just testing my new moniker out, Bob.

      • SpencerG says:

        No M.C. you have it wrong… he has been a different guy since he was finally re-confirmed by the Senate for his appointment in May 12th of this year. He pretty much HAD to hold back until then. Now the gloves come off.

        • Kenneth M Luskin says:

          He is the same pumping fool he was before… But, after his last moronic conference, when he said that rates were now “near neutral”, 5 Fed insiders refuted his Powell’s stupidity, as did many others ex-fed insiders.
          So, Powell was supremely embarrassed, and he once again got the message that he needs to stop SUCKING UP to Wall st.
          Bottom line:
          Powell is a MORON!
          FULL STOP! PERIOD!

        • phillip jeffreys says:

          Not a contentious argument, but at what threshold do rising interest rates impact debt payments – is there a built in governor on Fed leeway in other words? The professional financial community response to this challenge has been all over the map.

        • Cytotoxic says:

          He never said that Kenneth. Spencer is completely right, this is Dark Powell. The era of cheap money is ending and Dark Powell is its destroyer.

    • Cyrus says:

      And yes I still had to get in an argument with someone insisting that the pivot was just going to be delayed by another meeting now.

      Not all of them get it, even still.

    • BenW says:

      Today was a blip. It took 3 years for the housing market to bottom leading up to and after the great recession. ANYONE who thinks the Fed was on the verge of pivoting after 225 basis is nonsensical. Can the Fed go higher than 400 basis points? No, I personally don’t think so. The Fed knows the FFR has to stay around 4% for most of next year.

      If CPI stays at or above 8.2% for August, then 75 basis points is certainly on the table. Below means 50 for September and most likely October. Then, the Fed won’t go more than 25 in Nov and may actual pause until January at which point we “may” find ourselves at 400. This gives them time to see what the economy / inflation / labor market have up their sleeves.

      Wall Streeters talking up an early pivot were just click baiting to push up the markets. Now, it’s time to sell off, and the relief rallies will be much smaller over the next 12 months.

      The Fed / Congress will not let housing tank more than 15-20% AT MOST.

      • SocalJohn says:

        Dream on Ben. The decline in housing will be much larger than 15-20%, and the Fed/Congress already know that’s coming. In some markets it’s already happened.

        • Dazed And Confused says:

          According to Case-Shiller HPI, house prices are up about 45% nationally over pre-pandemic (end 2019) levels.

          So a drop of 20% from current levels over say the next 18 months would leave house prices up about 16% from pre-pandemic levels at end 2023 – which is probably where they would have been if there had been no pandemic following the trend lines from the pre-pandemic years.

          So a 20% drop does not seem unreasonable at a national level. Of course some markets are up much more than 45% during the pandemic and may suffer much larger falls than 20%

        • Pea Sea says:

          15-20% hasn’t happened in any markets.

        • Wolf Richter says:

          Pea Sea,

          “15-20% hasn’t happened in any markets.”

          Hahahahaha, what revisionist ignorant lying troll BS. Check the 40% to 57% plunges during the housing bust, including (Case Shiller):

          San Diego -40%
          Los Angeles -42%
          Seattle -32%
          Phoenix -56%
          Tampa -48%
          Miami -51%
          San Francisco -45%
          Las Vegas -57%
          Chicago -40%
          Atlanta -40%

          My monthly series, “The Most Splendid Housing Bubble in America…” depicts those declines in all their glory, and if you ever read them, rather than just trolling the comments, you would have seen it and not said this BS.

          You’re on the wrong site to try to spread this BS. People here know this stuff.

      • historicus says:

        The Fed says 2% inflation is the proper trajectory. This in itself is suspect as it is charged with stable prices.
        But with a 9% spike, why is any inflation acceptable?
        Price rollbacks are needed to return to the Feds trajectory. The fact there is no discussion of this is very telling

        • CRV says:

          You are right to suggest a price roll back to relieve some inflation pain. But you are talking about deflation. To bankers that is like cursing in church.

        • Dazed And Confused says:

          Good point, historicus – the Fed’s own target is average (geometric mean) of 2% inflation over the business cycle (recession end to next recession end i.e. one full expansion + one full recession).

          So the Fed should be targeting deflation not just disinflation to achieve their own stated target.

      • QQQBall says:

        @BenW… this Fed is probably the most clueless ever. They held rates at ZeroBound forever. They are playing whack-a-mole with peoples’ lives. Think in terms of unintended consequences – higher rates, higher USD, EM drawdown 100% of IMF SDR drawing rights… and so it goes. The Fed is trying to lower inflation by damaging the economy including unemployment rate. In what universe is this price stability? The one thing JPow got correct is the pain reference. Winston’s comment was spot-on and real HH incomes have been declining. I just looked at rents in my area and was shocked how high they are.

        • Einhal says:

          You’re not alone. Most people who don’t rent have no idea how high rents have gotten, which is precisely why “owner’s equivalent rent” is such a poor measure. It’s not that the people who answer the questions are lying. They just don’t know.

      • jon says:

        “” The Fed / Congress will not let housing tank more than 15-20% AT MOST. “” I thought the same in 2008 .

        So, it is OK for FED/Govt to inflate the housing market to the tune of 50% or more in last 2 years but it can’t let it go down by 15-20% at most :-)

      • gametv says:

        If you are saying only 15-20% off the peak prices, then I disagree with that. I say it will decline 15% over the next 4-6 months and then another 20% over the following 2 years, to hit a bottom at year 3. Housing markets take time to drop.

        • ru82 says:

          I just read an article in thedailymail web site saying that Moodys is saying the same thing. Austin TX is 66% overvalued, Charlotte is 60%, Boise is 72%, Nashville is 54%, Flagstaff is 61%

      • Kenneth M Luskin says:

        >>>”The Fed / Congress will not let housing tank more than 15-20% AT MOST.”<<<

        Last said in early 2006, just before people like BenW lost their shirts in speculative real estate, and tens of millions of ordinary folks lost everything because they thought real estate would never decline.

        I would like to indulge in a little of what you are smoking/snorting/popping, on a Saturday night when I try to forget how bad things are going to get over the next year or so….

        Thanks for the bedtime fairy tale/ Pipe dream***…
        ***"The phrase 'pipe dream' is an allusion to the dreams experienced by smokers of opium pipes.
        Opiates were widely used by the English literati in the 18th and 19th centuries. Samuel Taylor Coleridge was one of the best known users, and it would be difficult to claim that the imagery in surreal works like Kubla Khan owed nothing to opium. Lewis Carroll, although not known to be an opium user himself, makes clear allusions to drug use in Alice's Adventures in Wonderland. Sir Arthur Conan Doyle has his hero Sherlock Holmes visit an opium den – although that was for research rather than consumption.

        It's strange then that 'pipe dream' comes from none of these sources but has an American origin. The early references to the phrase all originate from in or around Chicago.
        The first printed piece that associates the phrase with opium smoking is from The Fort Wayne Gazette, September 1895:

        "There are things taking place every day in Chicago which are are devoid of rational explanation as the mysterious coinings of the novelist's brain. Newspaper men hear of them, but in the rush for cold, hard facts, the 'pipe stories', as queer and unexplainable stories are called, are at a discount. Were it not for this the following incident, which can be verified by the word of several reputable men, would have long ago received the space and attention it merits instead of being consigned to the waste-basket as the 'pipe dream' of an opium devotee."

        [The piece goes on to describe an incredible story, apparently believed by the reporter, of a mystic incident in which a man foretells in detail the suicide of another man. It rather makes one wonder what the reporter had been smoking]"

        "Yet another reference in Chicago, in September of 1895, demonstrates the true origin of phrase in terms of meaning, namely, as a reference to the dreams experienced when smoking opium. This September of 1895 reference is from the Fort Wayne Gazette:

        There are things taking place every day in Chicago which are devoid of rational explanation as the mysterious coinings of the novelist’s brain. Newspaper men hear of them, but in the rush for cold, hard facts, the ‘pipe stories‘, as queer and unexplainable stories are called, are at a discount. Were it not for this the following incident, which can be verified by the word of several reputable men, would have long ago received the space and attention it merits instead of being consigned to the wastebasket as the ‘pipe dream‘ of an opium devotee."

        In his 1896 play, "Artie – A Story of the Streets and Town", the American columnist and playwright George Ade penned this line:

        "But then I was spinnin' pipe dreams myself, tellin' about how much I lose on the board and all that."
        t seems clear that that Ade would have expected his audience to have prior knowledge of it. He goes to no effort to explain it in the play and the meaning wouldn't have been clear otherwise. So, its reasonable to assume the expression 'pipe dream', with the meaning we currently give it, would have been in common use in the USA in the late 19th century.

        'Pipe dream' wasn't known in England until a few years later and it is probable that it was introduced there by the American novellist Bettina von Hutten, who took up residency in London. In her 1904 novel Pam she includes the line:

        Look at the sea, and tell me if, in your wildest pipe-dream, you ever saw anything lovelier."

    • Asul says:

      Finally: the nail in the coffin of Modern Monetary Theory and the decade of negative rates.

    • Kenneth M Luskin says:

      The problem is that Powell created the “Pivot” mentality with his moronic comments after the last Fed meeting that Fed Funds “are now near neutral”…
      So, at after the last Fed meeting Powell yet again invited hundreds of millions of investors world wide to believe that he has an inkling of a clue about how to run Fed policy in a responsible way over the long term.
      But, after Powell said “Fed funds are close to neutral”, 5 Fed insiders rebutted this moronic comment….
      Still, greedy myopic investors wanted to continue to believe that Powell would further embarrass himself to please Wall St….
      Still. bond investors and most stock investors have been conditioned over the last 40 years to believe that IF the economy weakens that automatically means inflation will immediately turn into disinflation.
      Unfortunately, that is NO longer what is happening globally.
      The concept of STAGFLATION continues to fall on deaf ears, Cro-magnon thick skulls, and those controlled by their wishes rather than actual reality.
      = Investors in stocks, long term bonds, and lower rated bonds will get destroyed over the next year or so…. As will those who are highly leveraged and speculating in real estate, Crypto crap, etc., etc,
      Its GAME OVER!!!

  2. phleep says:

    Maybe the message is sinking in. I liked the historical reference to the 70s Fed’s starts-and-stops not working. It shows thinking beyond people-pleasing (as in the two previous Fed flinches).

    Meanwhile, I was provided a super-sweet buy-in point for VIXY recently, as summer and Fed-doubting worked their magic on sentiment.

    I was shocked lately when the meme stocks jumped up. I might doubt Powell sometimes, but not THAT much. It is NOT giddy 2021. Many even shaky firms have nice financing locked in for awhile, but I must believe some pretty visible failures will happen soon, especially in tech.

  3. Brewski says:

    Will be very interesting to see how much pain the Fed can stand.

    Our political hacks will be pounding the table for more and more monetary pumping and fiscal irresponsibility.

    I’m tightening my seat belt preparing for a rough ride.



    • Goomee says:

      The Fed isn’t felling any pain. What, they are going to get fired?

    • Flea says:

      Fed tightenes,congress spends pretty easy set up

    • BenW says:

      When the FFR moves up to 3.5%, the Fed is going to feel some pain. At a certain point not far down the road, the Fed is going to start bleeding red. Their surplus remittances to the Treasury will turn negative. Yes, the Fed can and will lose money. They’ll just amortize the loss, so it goes “poof”!

  4. Dave Mac says:

    How will the financial media puppets spin this terrible mess?

    Will they finally admit it was The FEDs fault or will they blame Hedge Funds or Putin instead?

  5. Tim says:

    But they said zero inflation

    And changed the definition of recession

    Im starting to think they arent telling the truth

    • rojogrande says:

      The definition of recession hasn’t changed.

      The Fed has done everything it said it was going to do since at least last November. Arguably, they’ve moved too slow, but they haven’t lied.

      • Steve says:

        If they haven’t, they are inept. You decide which one.

        • rojogrande says:

          I don’t have to decide which one because I don’t know what you’re commenting about. If they haven’t what: Changed the definition of recession, done everything they said they would since November, moved too slowly, or lied?

          If you’re referring to my comment “haven’t lied,” do you really mean to say they need to lie in order to not be inept?

        • Steve says:

          The Fed is both inept and lies to cover their mistakes. It can be called semantics, but inflation is transitory? Come on.

        • aaron says:

          For the critic, hindsight is always 20/20.
          For the pundit, foresight is always 50/50.
          But for the self-righteous critic-pundit, they will always choose which one they want, to prove they are correct, and always have been.

        • rojogrande says:

          As stated, my original comment only goes back to last November when the Fed retired the word “transitory” and laid out their plan to stop QE and start raising rates.

          I tend to think the “transitory” talk before November was wishful thinking and an enormous mistake, but if you think they were consciously lying you’re certainly entitled to.

    • Pea Sea says:

      You’re very confused. Who’s “they”?

  6. Michael says:

    I just bought 100K shares of kimberly clark stock. Investors are going to need those Depends, now. ;-)

  7. jon says:

    Absolutely no reason for FED to pivot.

    I hope home prices also go down with time to be made more affordable

  8. Harrold says:

    Bloomberg is saying corporate profits are at the highest margins since 1950.

    A lot of that inflation is just companies jacking up their prices.

    • Wolf Richter says:


      That is 100% always the case. Companies jacking up prices is THE definition of consumer price inflation.

      The question is: what allows them to jack up prices without losing sales?

      In 2019, they couldn’t do it, now they can. What’s different?

      There are lots of answers, and they include the “inflationary mindset” (people and businesses going crazy and paying no matter what) and excess demand, fueled by all this money sloshing around.

      Both of those the Fed is going to be able to address by tightening “forcefully.”

      • Steve says:

        The rich still have too much money though a lot is paper wealth that is not real and will vanish. But the pain has already started on them and is deep already in the bottom 70%. The downturn escalates, faster.

        • sunny129 says:


          The rich also have expert invest managers who can also buy and hedges including PUTs to avoid the Bear. There are also tools for the common retail investor but are hesitant to use or don’t believe them!
          Just like in all bear mkts, the retail investors will end up holding the bag. Many in (45y or below) will painfully their FIRST experience of going thru secular Bear mkt. Exact reversal of last decade!

        • Winston says:

          “The rich still have too much money though a lot is paper wealth that is not real and will vanish.”

          There’s a graph I’ve seen which shows the total assets of the top 1% (or was it the top 0.1%) which shows that their wealth has a ratchet effect growth – approximately two steps up during a bubble, one step back during the bust. They short during the bust and can buy -REAL- assets at fire sale prices. Thus, there is no pressure to change the system coming from those in a position powerful enough to change it.

      • Educated but Poor Millennial says:

        As they said:
        “we must keep at it until the job is done.”

      • Col. Straker says:

        ..and for the retail consumer, many are homeowners who see the equity in their homes as buying power to keep consuming… that gravy train is over and the homeowners are now going to massively tighten the belt as they see their net worth evaporate. Corporate bottom lines will erode very quickly. Top lines already have been, they’ve just been cutting costs, cutting jobs, and raising prices to compensate.

      • Depth Charge says:

        I don’t eat much junk food, but one guilty pleasure is Kettle chips. I only buy them on sale, but noticed that the bag has now shrunk from 8.5 ounces to 7.5 ounces, and the price has increased dramatically. I have scratched those off my grocery list permanently. GREED.

        • Flea says:

          I only buy stuff on sale then try to get a years supply easy money if it doubles in price in a year

      • Kunal says:

        No the real reason is more and more businesses in USA are becoming monopoly. Most big tech are monopoly. Most telecommunications are monopoly. Most wireless service providers are monopoly. Mobile vendors EV companies are all monopoly.
        Whole Foods
        Meat processors
        Food supplies
        It’s a long list…

      • Daniel Perez says:

        The inflation is structural, and has nothing to do with policy or Covid. The last crisis simply precipitated it. We are on the verge of a rebalancing of geopolitical and economic equilibria. Bullish on Asia and BRICS, bearish on the Western suicide cult (forced ESG?)

        • phillip jeffreys says:

          Agree. If the thought process is that global forces, at this point, are in the driver’s seat.

          As an aside, naif that I am, I don’t get the focus on pre/post Covid as the demarcation point for assessing current economic state – as the basis for judging policy. Yes, I get stimulus excess, etc., but the data shows monetary expansion beginning in 2008 (i.e., steepening of the slope); the data shows unbelievable ramp up in federal debt in the last two decades. The data shows this is a global phenomenon. We have a ruling class (in the US and Europe) that is attempting to restructure the entire energy foundation that has has sustained economic growth since sometime in the 19th century (pick your point). We have the gov’ts representing over half the global population basically saying we are going our own direction, we are not cratering our energy sectors and we’ll raise you one by cornering commodities you will need to forward whatever your supposed energy transition plan assumes. At this point, while it is interesting to be distracted by housing market price predictions, that’s a sideshow to the larger forces in play. That is to say, housing market prices will be swamped by these global forces.

          Moving deck chairs on the Titanic – IMO.

    • The Real Tony says:

      Profits can only fall just like in the 1970’s. History just doesn’t rewrite itself.

  9. Twinkytwonk says:

    To be honest people have seen the fed ,Boe etc bail out the big boys and the debt junkies so many times I’m not surprised that people struggle to believe they will do anything about inflation.

    Here in the UK everyone is going on strike even when they are offered 8% pay rises and a cash bonus on top in the case of the dock workers.

  10. rojogrande says:

    Excellent article, thanks. You obviously got this out fast so in the second paragraph I think you meant “rate cuts” not “rake cuts.” Unless the rake is the rusty shank Depth Charge referenced. ;-)

    In the eighth paragraph where you talk about the crashing markets, they did go “Down down” but I think you meant Dow Down.

  11. Cold in the Midwest says:

    This economy needed the cold shower. I know denial ain’t just a river but the level of “irrational exuberance” in recent weeks was borderline ridiculous. I think Powell sensed the markets have not been taking his previous comments seriously. Hence, today.

    By the way, Powell looks exhausted.

    • Depth Charge says:

      He looks like he has the whiskey flu.

    • Swamp Creature says:

      Powell will be the next Paul Volcker. He finally gets it. IF Mike Lindel (The my Pillow dude) can go from being a crack head to CEO than anything is possible.

      • Cytotoxic says:

        I think I found someone who gets its. Powell is very likely to be The One who ends the cheap money era.

  12. rbblum says:

    As Powell stated, the Fed’s intent is ‘to return inflation to 2 percent’.

    B U T , WHY would the Fed Res embrace the effort to inflate the USD at any rate since such an effort diminishes the value and integrity of the USD) ?

    • Dazed And Confused says:

      Modern central banking dogma is that 0% inflation risks a deflationary spiral in which conventional central banking policy becomes ineffective leading to ZIRP, NIRP, QE and other dubious and ineffective mechanisms to attempt to exit the spiral down.

      See Japan for last couple of decades.

      2% provides a reasonable buffer to insure against the risk of a deflationary spiral.

      Not saying that I agree with any of this but I think that’s what a central banker would say.

      Regarding the Fed specifically, they have a dual mandate of stable prices and full employment so it’s reasonable for them to consider 2% inflation + 5% unemployment to be better than 0% inflation + 8% unemployment.

      • JeffD says:

        “Modern central banking dogma is that 0% inflation risks a deflationary spiral”

        If they can get to 3.5% within two years, I will be shocked. 0% is the last of their worries at this point, even if they pulled out all the stops to try and reach that goal.

        • c smith says:

          IF they get inflation back to 5% in the next year (say), that still means P/E ratios are about 5 points too high. A 20 or 21 P/E is perfectly reasonable when inflation is 2%, but at a 5% CPI a 14 to 15 P/E is more like it. Fourteen times the current 2023 S&P 500 earnings consensus is about 3360. The S&P touched 3675 in June. Soon it’s going lower than that – particularly if earnings weaken materially because of recession.

        • Wolf Richter says:

          “Modern central banking dogma is that 0% inflation risks a deflationary spiral”

          LOL, yes, totally correct.

      • cb says:

        “2% provides a reasonable buffer to insure against the risk of a deflationary spiral.”

        pure propagana.

        2% inflation supports bankers, which is what the owners of the FED are. It encourages borrowing and borrowers by subsidizing lending and trying to build in positive carry for asset purchases. It is a primary mechanism of theft through financial engineering. It encourages, along with tax deferment and other market supporting bastardized rules, continuous investment in the stock and financial markets. It encourages imprudence and maintains and builds the wealth gap. It allows temporary deviation from the pure inflation policy, which creates asset volatility and allows occasional “harvesting” of assets by those in the know. It is a tool of class suppression. Consider the interest rate suppression practiced by the FED with their simultaneous 2% inflation target, which created massive asset price inflation and mispricing and the brainwash of middle class 401K passive stock market investors. It favors the scumbags working Wall Street, Goldman Sucks, Private Equity, etc. and the bank owners. It favors harvesting through rent rather than productive creation.

        • Exactly correct.

        • 91B20 1stCav (AUS) says:

          cb-excellent observations through the everpresent smoke!

          may we all find a better day.

        • Steve says:

          Could not have said it better myself. And I have said it myself, many times, just less eloquently. There is a reason they’re called banksters, sadly people don’t understand. The reason…a controlled media and a lack of financial literacy.

        • Rob Mantis says:

          That is why it’s called Capitalism, we are ruled by Capitalist oligarchs. More recently spelled Fascism.

      • Powell is a rationalizer, the most common cognitive error of smart people. His motivation is fully fear -based. Yes, he’s afraid of price instability at current levels. He may fancy himself another Volcker. However, asset value collapses in the bond, stock & other markets will frighten him more. He will then justify his fear-based response (pivoting) as a temporary measure to restore asset-price stability.

        • cb says:

          He’s not that smart. He’s just a common thief under cover of law. Typical self important, indulged, born on third base/owning the ball park, private equity type. Think Mitt Romney.

    • InLimbo says:

      Rbblum – agreed. I’d be OK with a targeted 1/2 % inflation rate.
      I would listen to a good reason why FED should have a higher target inflation rate.

  13. Rivenshield says:

    So should I get up bright and early on Monday morning and buy a bunch of SQQQ….? Will the market continue to deflate, or will it continue to work its own will?

    • Kyrtsyn Podgajski says:

      Futures are down 1100 right now so…

    • Ed C says:

      It will do whatever it needs to do to thwart and punish the maximum number of people. Take my word for it.

    • ThinkForMoney says:

      My plan. Unfortunately you missed about 12% today. Maybe TZA too, Russell 2000, more “growth stocks”. Both Triple inverse with the value decay over time so a little dangerous if you don’t have direction and timing right. I usually sell covered calls on these to produce some income and offset risk a bit.

  14. Pea Sea says:

    I’m no tightening-denier–just someone who denies that the Fed is tightening nearly enough, and has recently denied that they understand the importance of messaging–and my take on J-Pow’s speech today is as follows: I’m impressed.

    This is what he should have said last month, and I think he understands that now.

    • Ricky says:

      They must have really cranked up the juice in good ol’ Jerome(GOJ)’s re-animation chamber today. Dropping red-hot Volker warnings like his NY branch drops trillions at the over-night discount window.

      The HF’s, Institutions, and others – as Wolf mentions – have performed the market equivalent of a full “mooning” of the full-frontal variety towards GOJ with a complimentary waggle, in my opinion, over the past 7 weeks or so. So he had to grab the mic and save face, just like well a scripted WWE plot.

      So, like Pea Sea mentions, how much tightening is really taking place? Especially when the NY FED is addicted to pressing the money button?

      I am semi-impressed, however I will be fully impressed and, perhaps equally terrified, if he backs his Volker warnings with Volker-like action and also sends the Plunge Protection Team on a 1 week vacation to see if the bears eviscerate this last run up like they did around June 8th – 13th.
      They are off to a good start as of AH close today.

      The terrifying part comes in, for me, once the DIA plunges through 300. Followed by vaporizing collateral as the blue chips start to bleed out.

      Seems like the USA’s pot of issues may be starting to boil over just as some of the other pot’s scattered across the globe begin to boil over as well. Maybe my tin cap is on a little too tight? It’s just how I’m seeing it.

      And, by Volker-like, I don’t mean 1000bps but maybe 100bps?

  15. Drowningfish says:

    Hi wolf, what do you think are the preconditions for fed to actually pivot? 4% inflation? 3%? Or unemployment above 5%

    • SpencerG says:

      Central bankers who are serious about defeating inflation could not care less about high unemployment rates… those are just the price of admission to the game. Volcker certainly didn’t.

      Nor should they… twenty years ago, four to five percent unemployment was considered the “Natural Unemployment Rate” in America. So I don’t think the Fed will pivot simply because unemployment gets to that level.

      • Kurtismayfield says:

        They could give two #$@&’s about the unemployment.. it has no effect on them or their shareholders. It only destroys the lives of the hou polloi.

        If there is a large asset price deflation.. watch them pivot so fast that even an ice skater will get dizzy watching them.

        • Sams says:

          And that might be their demise. If the majority of people no longer have any trust in the society as is they will no longer maintain it. Maybe no riots, just mass non compliance.

    • Abomb says:

      Did you not RTGDFA?

      Can I say that too?

  16. One and a Penalty says:

    Just as a side note, does anyone else think it’s ridiculous that investors wait with bated breath for the Fed to speak and when Powell finally does, they drool and slobber over themselves parsing every syllable the guy has to say? Then the market either tanks or goes up. To state an old phrase, this is no way to run a railroad. Is there any way we can just rely on the free, open market (with reasonable regulations)?

    • Thunder says:

      This happened also with the great magician Greenspan. Pavlovian slobber has been ingrained by the sound of the Bell over all those decades

    • jr says:

      They’re not investors, they’re speculators, gamblers, addicts. Desperate to place the next hot bet.

    • sunny129 says:

      One and a penny

      Without explicit help of Fed since March of ’09, there wouldn’t have been this surreal Bull mkt. Investors were/are addicted to ‘easy-peasy’ money!

      Fed is now trapped and forced to do what’s needed!
      Will they sit tight when the indexes go minus 30-40%?

      • doug says:

        Yes. I think they will. Current President has never taken credit for the stock market. And it is going to take that to bring inflation under control IMO.

      • HowNow says:

        No, the FED will not watch the market crash, in a serious manner. And Powell’s tough talk is just a test to see if his microphone is still working.

      • SocalJohn says:

        Only a small group of insiders know, but I find it interesting that so many CBs are either tightening or moving in that direction. Also found it interesting that Mester (CLE fed) described the current situation as a recalibration. I am suspicious that we may be entering a new era for monetary policy. The previous era failed miserably, and I think the CBs know that, so maybe this is motivating change

        • Steve says:

          I feel they are engineering our psychology to welcome their new digital currency with unlimited keystrokes as they’ve destroyed their last currency by debt and inflation.

  17. patrick says:

    hope he follows his “tough words” with “tough actions” it is an election year – as we travel this summer literally all over the country catching up with friends and family we see 0 slow down in spending – its a tidal wave of money out there

    • The Bob who cried Wolf says:

      I’m wondering the same thing myself. It seems that one could practically count on mortgage rates to go down in the few months before an election. This speech tells me that the fed is way more worried about out of control inflation if they’re willing to go against the the intense pressure from the White House.

      • Miller says:

        The White House is probably one of the big driving factors for the Fed to turn so hawkish and for JPow to openly call on the example of Paul Volcker like this, that meeting with Biden and Yellen was apparently a big factor in convincing Powell to be more aggressive with raising interest rates and QT. The “intense pressure from the White House” is to fight inflation, not to keep already bloated and overvalued assets up in the biggest Everything Bubble in US history. Inflation is much more damaging to a ruling party’s political chances than a recession, because it’s so widespread and affects everyone, pushing down the value of the currency and the purchase power of hundreds of millions of people, potentially with no end in sight. Even a bad and deep recession is temporary as contrast, and it’s necessary to pop such a massive group of asset bubbles like we have right now, esp the housing bubble and the bubbles in other necessities (like higher education and healthcare) that are crushing the ability of Americans to start families.

        In fact, sustained runaway inflation has brought down far more great empires and major powers in history than any war has. So prioritizing the fight against inflation now is smart policy both politically and economically, for both the Federal Reserve and for the White House, short term pain to provide some long term gain. That’s what Volcker realized in the early 1980’s, the recession in 1982 and 1983 was horrible, but it was the economic operation needed to pop those outrageous asset bubbles and halt that ruining inflation in it’s tracks. And that’s what Powell and Biden have caught onto too, it’s putting Biden more into the position of Reagan than Carter. A deep and severe recession like the early 1980’s one is now almost inevitable too, probably arriving in early 2023. But it’s the only way to fight these bubbles and bring inflation under control, and politically and economically it’ll bring longer term dividends.

  18. GrassRanger says:

    It is going to be very interesting to see the economic effects in 2023-24 with the Fed carrying out this attack on inflation. With Congress pushing out fiscal largess in response to the almost certain crash in employment, the politicos will be holding the Fed governors with the same level of contempt as they are currently reserving for the Supreme Court. With all the sand in the air from other issues, things will be very s***ty by this time next year.

  19. JeffD says:

    “And today Powell, in clear and precise language that would be hard to twist into anything different”

    I saw several pundits on TV imply he was dovish. *Traders*, of all people, were actually fighting me in ZH comments about his comments being the opposite of hawkih, like this gem, after I said his strong comments implied a 0.75% hike in September: “did you read the same presser I did? Cuz that aint what it says at all.”

    • Wolf Richter says:

      Yes, the tightening-deniers have started to fan out and spread their BS. Let’s see how far they can go with it this time.

    • RockHard says:

      It’s ZH, people can claim to be anything.

      But if they actually are traders, have you considered that maybe they’re trying to line up as many people on the opposite side of their own trade as they can? If I were making serious money in the market, I sure as hell wouldn’t be going on ZH telling people what I’m really doing.

      • VintageVNvet says:

        GOOD point RH:
        Been 40+ years since in the SM for many reasons, including especially the procedure you suggest for this time around.
        Traders want to trade for profit, and don’t really give a bit of care to where any stock or other assets ends up as long as they make their profit on trading up and down.
        As long as the SMs are dominated by this metric rather than the metric of investing to help companies, the financialization fooked up situation we are in will continue…
        Now almost a ”quadrillion” of financializations that have NO basis in reality,,, only basis in ”greater fool” and similar concepts.
        Some of us may very well welcome the coming crash to at least bring SOME semblance of reality back to SM AND RE mkts.
        Not likely, yet IMHO, as it is likely to take a full scale depression worse or much worse than the 1929-1941 era depression to clear away enough of the fook and dross and slime now prevalent in every asset class.
        At this pint,,, very sad for the current crop of children who will pay and pay and pay if this total show does NOT go south…

  20. Steve says:

    Since at least Greenspan, the Fed has created bigger boom bust cycles just deferring the debt from Fed engineering and greed of Wall St. But really Nixon started the mess with unbacked dollars. Inflation is just dollar illegitimacy if you will and the Fed is desperate to save face and their debt backed fiat paper. The Fed has allowed wall st with help from Joe public to replace capitalism and true discovery with artificial asset values(inflation) through debt expansion theory engineered by them. After Bernanke and Yellin they crossed the Rubicon on ever having a standard of living like it was. Now every cycle has a bigger boom bust as all they do is defer equilibrium, debt and inflation. Right now they would have to crash the economy much worse than 2008 to reach par for the next cycle imho because of massive more debt and misallocations. Imho I say he knows it, will do it to protect his fiat currency, and cause unbearable bankruptcies all over. I see this outcome now in his face, a very sad man.

  21. Wolf Richter says:

    OK, didn’t take long for the tightening-deniers to come out with a new theory.

    WSJ: Fed’s Tough Talk Could Be Transitory


    • Halibut says:

      That ain’t gonna convince me to try and catch this falling rusty shank.

      • Miller says:

        yeah that’s probably what the WSJ headline is really about. The Big Boys on Wall Street need more naive bagholders in the retail investor class (aka the sheep before the slaughter) to swoop into the next bear market rally, to buy up falling assets–falling here meaning “returning to more realistic valuations–to unload their positions and cut their losses. And enough retail investors will be dumb enough to try and catch the falling knife that they’ll probably get away with it, partially at least. After all “the WSJ said it so it must be true”, repeated by enough of the sheep to get suckered in to get left holding the bags that the hedge funders and institutional investors will be happy to unload into their hands.

    • JJ says:

      Well it IS a non-falsifiable headline statement, is it not?

    • Steve says:

      You do read imho he will tighten all the way to extreme bankruptcies and deep recession right? Just to save his currency, the only thing that gives them credibility.

    • Gattopardo says:

      I hope that pivot talk kicks in again. I watched that bear rally and was too timid to short any more than I already had. One look at ARKK says it all….That was a GOLDEN opportunity to profit from idiocy. So I welcome another round of that (right after I cover!).

    • Ricky says:

      There’s that word again!

      They tried that one already. Pull the plug on the Large Haldron Collider, please. We’ve reached the bizarro dimension. Thank you.

    • Sam Lowry says:

      Wolf Richter: “OK, didn’t take long for the tightening-deniers to come out with a new theory.”

      Inflation is expansion of the money supply, not rising prices. The latter is a consequence of the former. The government has redefined ‘inflation’ as the latter to direct attention away from the former, and in a way they get to decide the measure. But even their totally-rigged measure of inflation is accelerating, which is why they are in a panic.

      Powell in his own words: “If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will.”

      This is simply a lie. Inflation is a function of Fed policy, not a matter of public expectations. Powell’s job is to convince those who are still desperate to believe in the benevolence of the oligarchy that the oligarchy is acting (or will act eventually) in our best interest, by raising interest rates. That is, Powell’s job is to maintain a faith in the value of the dollars the oligarchy increasingly creates out of nothing, by threatening, but not yet actually imposing, significantly higher interest rates.

      The Fed should not be praised for challenging the “tightening-deniers”. It should be eliminated, or, more likely, abandoned.

      • Wolf Richter says:

        “Inflation” means a lot of things, from “grade inflation” to “monetary inflation.” Everyone except YOU knows that we’re talking about “consumer price inflation” here, so rising consumer prices, meaning companies are raising their prices. There is also asset price inflation and wage inflation and wholesale inflation and what not. But we’re talking about consumer price inflation.

        Your other point: what caused this consumer price inflation? Lots of things did, including monetary policies and government stimulus spending. But inflation is always at least in part a psychological phenomenon. And when the “inflationary mindset” – people and companies paying no matter what – kicks in, that’s when you get big consumer price inflation.

        • Sam Lowry says:

          Wolf Richter: “But inflation is always at least in part a psychological phenomenon.”

          Inflation, by the original definition (see any dictionary before about 1980) is purely a monetary phenomenon. How and where inflation (again, by the original definition) manifests itself as rising prices and eventually panics/depressions/recessions is indeed a psychological phenomenon. This is why they changed the definition of ‘inflation’ to include such psychological phenomena, and why they invented the notion of “deflationary spirals,” and why they invented the CPI, which was exactly what I was talking about when I mentioned “their totally-rigged measure of inflation.” See Powell in his own words. I wrote more, but I’m sure I’ve already overstayed my welcome.

        • HowNow says:

          Sam, there is inflation due to scarcity, as in commodities, supply disruption, energy costs from suppliers who conspire to do so, duopolies and monopoly pricing power, and strikes: buyers strikes, labor strikes, to name a few. It isn’t always or totally a monetary phenom.
          But I doubt that you’ll change your thinking on this.

        • HowNow says:

          Sam: “This is why they changed the definition of ‘inflation’ to include such psychological phenomena.”
          Yet another conspiracy. Definitions change over time due to usage. “They”?? Do you know “them” enough to know that they were conspiring?

      • Cytotoxic says:

        No. Inflation is the loss of purchasing power by the unit of account, which can be caused by greater supply of the unit but isn’t necessarily, and can even be devalued without increasing its supply.

      • Steve says:

        100% correct.

    • SpencerG says:


    • Asul says:

      Well, someone has to buy the shares before the next selling spree.

    • Miller says:

      lol at the way “transitory” has become the go-to word for pure economic delusions these days. “inflation is transitory” and then when even the Fed and JPow say clear that it’s not and they’re fighting it aggressively, the Fed’s own hawkishness is called “transitory”. And in a headline by the Wall Street Journal of all places. How far the mighty have fallen, for the WSJ to be reduced to basically shilling for asset bubble speculators.

    • TweedleDum says:

      Not a tightening denier but just sharing some thoughts :). Presently, Cleveland Fed’s Nowcast is predicting cooling headline CPI, and sticky Core CPI & PCE. The FED may have to emphasize stickiness of core inflafion to support their policy stance, if MOM headline CPI is too low (negative?). A quick pickup in crude may obviate that. Btw, last CPI and PCE reports were below nowcast estimates.

  22. COWG says:

    While I’m glad to see some backbone finally…

    Doing today what you should have done years ago does not erase the damage done to many, many people and families…

    The people at the top are clapping their hands and saying “ if it’s over, so be it… Thanks, Jay for a nice run… we appreciate it… Have a nice gold and diamond Rolex on us for murdering the middle class…”

    Sorry, cheerleaders, no free pass from me…

    • David W. Young says:

      Agree, COWG. They say if you put a monkey in front of a typewriter, he or she will eventually type a word. The proverbial cow is not only long gone out of the barn, it has already been made into burgers and shoes. Were can I get a 90-day certificate in Bankruptcy Law??!!

      Something also tells me that the $20,000 Biden Absolution is going to be challenged in the courts ( besides the Court of Public Opinion ) because even Nancy P. knows a sitting Prez does not have debt forgiveness in his Executive Order Quiver of vote buying arrows.

      • ru82 says:

        It might be a great political ploy though to get votes. If challenged and it fails, the dems will accuse the Repubs for the failure and Biden will say I tried to fulfill my student loan forgiveness promise.

        It may be a smart move even if it passes or fails.

        • sageWexford says:

          Ru82, my niece just finished paying off some $20,000 in student loans over about 4 years right after she graduated with her Masters. Wow, it is like honoring your legal obligations, and student debt is a legal obligation, is a stupid thing to do as long as Uncle Sam is around with his printing press. Forgiveness, if it holds in court, expect a court injunction at some point on this order, is a terrible, terrible precedent to set at the highest office of the Land.

        • 91B20 1stCav (AUS) says:

          sage-ah, ‘moral hazard’-‘Murica’s financial/social condiment of choice for some time, now…

          may we all find a better day.

  23. nick kelly says:

    ‘The successful Volcker disinflation in the early 1980s..’

    It was deflation in real estate here. Vancouver prices lost over 23 %. The Canadian private sector mortgage insurer went bust, leaving just CMHC ( gov)

    Here in Nanaimo a brand new prestigious subdivision (Oakridge) went back to First National Bank. The loan had been for prime plus 6 or so. So when prime hit 15…

  24. The Longer View says:

    Wolf, I think you are simplifying the issue here. The point you are missing is that the Fed has no credibility. After denying the problems for so long, and artificially suppressing interest rates for over 10 years, why should anyone believe them now?

    In addition, this isn’t the seventies. The federal deficit is MUCH larger now. It cannot be financed with 70’s style interest rates. It would bankrupt the government. As Lyn Alden has pointed out, the ONLY possible solution is the usual one that governments have employed throughout history: inflate the debt away by debasing the currency. Remember, debtors LIKE inflation. They can pay back their loans with cheaper dollars. And there is no bigger debtor than Uncle Sam.

    Then you have the progressives running the White House. Biden just added more flames to the roaring inflation fire with his blowout half trillion dollar student loan forgiveness program. Powell has never gone against Biden. And Biden would rather have the party continue. So, why should anyone believe Powell will go against Biden now? The progressives are already spinning the notion that 5 or 10 percent inflation maybe isn’t so bad after all.

    In conclusion, there are extremely valid reasons for not believing Powell’s bluster. He will be under unbearable political pressure to back off. He also knows, along with all of those professional traders you are denigrating, that the U.S. government cannot afford to finance the current deficit with high interest rates.

    • Wolf Richter says:

      The Longer View,

      The student loan forgiveness isn’t impacting inflation. That is money that was already spent years ago, handed to the educational-industrial complex. The borrowers just don’t have to pay it back. But none of them were/are paying it back anyway because all federal student loans are in forbearance through Dec 31, and even before the pandemic, borrowers were deferring it and making minimum payments etc. This is NOT money that Biden handed out — that’s a misconception. It’s a taxpayer asset that he destroyed, and that taxpayers will never get back.

      Some of the other measures, such as the $50 billion for chip makers and the EV incentives, are actual funds that the government will hand out directly or via tax rebates and that will get spent, and that will add to GDP and inflation and whatnot.

      “In conclusion, there are extremely valid reasons for not believing Powell’s bluster.”

      It’s up to you what you “believe.” For me, “believe” is something you do in church.

      • Steve says:

        Without “good faith” there is no business because a good economy requires trust to function rightly. I say the Fed now has no good faith or credibility left. There is a reason they’re called banksters. The Fed ever only made policies for the rich. Namely the rich that control the central banks.

      • jm says:


    • The Real Tony says:

      She never lives through it. For me its like hearing stories secondhand.

    • Multicore says:

      Correct. The short term outlook is deflationary, because of the global status of the dollar. Long term USD (hyper) inflation is unavoidable. Just think MMT, UBI, debt jubilee, generalized bailouts. All of these have already happened!

  25. CCCB says:

    The fed has been saying this exact same thing since last November. Whiever chose not to believe them deserves to lose their asses.

    • Third Chimp says:

      Yeah, but it’s so hard to interpret words, shouldn’t we be focused on what the Fed is doing with their personal portfolios? Is Powell still invested mostly in stocks or in cash? Are Fed officials required to disclose what they’re investing in?

    • cb says:

      what genius …………….. that anybody who doesn’t believe demonstrated liars deserves an outcome

  26. AK says:

    Do these fighting words from Powell mean that September interest rate hike will be 75 bps or larger ? It better be, or he will lose credibility.

  27. Dazed And Confused says:

    Did Powell say anything about QT today?

    • JJ says:

      I didn’t catch anything noteworthy, which tells me ‘all systems go’ on the $95B/mo starting next week.

    • Thunder says:

      Yes my question as well. QT is the key to deflating the irrational exuberances built into this gambling den. It will do nothing much for inflation. That cancer eats everyone’s lunch starting with the poor and ending when the middleclass who find they have exhausted all credit to continue. Savers are called savers for a reason, savings are fuel for recovery. If inflation eats savings it is all over

    • Wolf Richter says:

      QT is running on track like clockwork. No reason to mention it. It’s running “in the background.”

      • David W. Young says:

        Wolf, watch the prices sink on the longer end of the maturity curve in Treasuries. Realization of Party Over will be painfully clear to the bond trading houses as inflation lights a fire under 20 and 30 year Treasury yields as Fed fed supply or lack of further Fed buying enters the bond market pricing equation !

        Sinking bond prices will spill over into the Corporate side of borrowing insanity where the Default Risk adjusters will boisterously once again ride back into town as the Zombies rise to haunt bond buyers. These walking dead companies still need working capital financing with inadequate cashflows from faltering revenues flows that have existed from Day One, even if intermediate financing on prior debt has be locked in.

        Most newbie investors today don’t realize what persistently draining liquidity in the bond market really feels and looks like.

        • JJ says:

          David, I can certainly imagine what draining liquidity will look like, with zombie corps filing BK and lots of layoffs, slowing down spending for everyone else, etc.
          The cute little delicately-constructed. QE generated Potemkin village will be stomped upon!

      • Bruce Gellerman says:

        Actually, it’s not running like clockwork. The Fed will only really start putting $95B/month of Mortgage Backed Securities on the market in Sept. No one really knows how this will impact interest rates. The Fed holds &9 trillion in MBSits going toget very ugly. Tho those with short term cash can try to ride the interest rate waved.

        • Wolf Richter says:

          1. It’s running like clockwork. The phase-in (June-August) is part of the clockwork.

          2. Your statement: “The Fed will only really start putting $95B/month of Mortgage Backed Securities on the market in Sept” needs to be reworded. The cap for the total run-off (Treasuries and MBS) will be $95 billion; the MBS cap will be $35 billion, the Treasury cap will be $60 billion.

          3. Yes, agree with the second half of your statement, starting with “No one really knows…”

        • ru82 says:

          The Ded only hold about 2.7 trillion in MBS. I think the rest is Government bonds and corporate bonds?

          yes, it Still it is a lot

        • Wolf Richter says:

          It sold all the corp bonds in 2021 — and made money on them.

  28. Yancey Ward says:

    While stocks tanked, I found the treasuries interesting- almost no movement at all today- even a slight decline by the 30Y.

    Powell, to make his point needs to do a full 100bp in the next meeting. And it had better not be a return to 50bp.

    • Wolf Richter says:

      The 10-year yield had shot up by 50 basis points in three weeks in anticipation of this hawkish speech. Everyone except for the tightening-deniers knew it would be hawkish.

      • Yancey Ward says:

        The 10Y should have shot up to 3.5%, Wolf. Doing nothing at the 3%, when the short term rates are now believed to be reaching 3% in just a week, tells me the bond market still isn’t buying rates going much further after the next meeting. You can bitch and complain about “deniers” all the time if you like, but the bond market itself is full of deniers still. I don’t give a shit what the 10Y has done in the last 3 weeks- for the last 3 months it has gone no higher than it was in May.

        This is why Powell needs to get rates to 5+% soon, not later. If he does 50bp in the next meeting, that will be dovish no matter what comes out of his piehole.

        • AK says:

          I think you are right that 50 bps rate hike will be interpreted by markets as sign of Fed timidity and lack of confidence. I think Powell understands it, so I am betting on 75 bps in September.

        • Wolf Richter says:

          The tightening deniers will claim a 75 basis point hike to be a sign of “timidity” and “pivot.” And even if the Fed hikes 100 bps, they will claim it to be “dovish” and “timid” and another sign of the impending “pivot.” These people are bitter-enders.

        • JeffD says:

          0.75% hike in September will finally convince a large swath of people that the Fed means business. Fingers crossed that they decide to do that.

        • ru82 says:

          Yancy. Your close. The Fed Fund rate always chases the 2 treasury going up and also going down. Some say just stop letting the Fed set rates and to auto track the 2 year. It was 2.73 in may but it fhas been suiting around 3ish since June and did not go up with the last hike. So these bond buyers think low 3s is top for now.

          But, if we get another high inflation print, you could see the 2 year spike some more because of the inflation print, not from the Feds actions.

  29. DEADAHEAD says:

    The darkness never leaves some men’s eyes
    The radical, he rant and rage
    Singing someone got to turn the page
    And the rich man in his summer home
    Singing just leave well enough alone
    But his pants are down, his cover’s blown
    And the politicians throwing stones
    So the kids, they dance, they shake their bones
    ‘Cause it’s all too clear we’re on our own
    Singing ashes, ashes, all fall down
    Ashes, ashes, all fall down

  30. breamrod says:

    you know if the fed doesn’t walk back some of this hawkish talk by Monday me thinks we might drop another 1000! can’t wait for Crammers meltdown.

    • Nate says:

      That would be a classic bear trap then. I dunno though, that’s a pretty huge drop in a day. More likely the drip, drip, drip of smaller losses I think if this all was a bear trap.

      • jr says:

        3% is nothing, the first circuit breaker is 7%. We haven’t seen anything yet……

  31. Nate says:

    I don’t know if I’m a “denier”. I think that the Fed will tighten until inflation goes down a lot more than what it was. But if that happens, I am skeptical the Fed will tighten a ton, either. Being a passive investor, I’m glad my strategy of admitting I’m clueless and dollar-cost averaging may again bail me out of my “hell if I know” opinion.

    I don’t buy 0.75% increases from next to 0% means that Powell is now a bad ass inflation hawk who is going to push the economy into a deep recession just to be safe. I do buy that IF inflation stays up, Powell will continue tightening even if we end up with a rough recession and lots of layoffs. Having been through two rather awful recessions and a pandemic, meh.

    • sunny129 says:


      “I’m clueless and dollar-cost averaging may again bail me out of my “hell if I know” opinion.”

      Dollar cost averaging works great during secular Bull but NOT during secular by history! Try Value averaging!? Diversification WITH uncorrelated assets is another strategy. The latter includes going against the mkt! Are you prepared?

      Check out the Bear mkts of 2000 and 2008!

      • Wisdom Seeker says:

        When the Credit Crunch Cometh, all assets become correlated except cash, which becomes King for a time…

        • Nate says:

          Cash? In a period of high inflation with rates still low?

          Jesus, I mean at least buy some anti-inflationary stuff like, I dunno, bullets and collectable hard copy porn, to soft hedge on the apocalypse trade.

      • Nate says:

        Bro, I have broadly diversified index investing since 2004. I went through the the gfr, the lost decade, and the pandemic freak out.

        Did just fine even after this most recent bear, and around my projections when I first started even though I was starting around a top before a huge bear.

        So, no, not really sweating 75 basis point hikes, single digit inflation, or any of this other stuff. Like worrying about monkeypox after going through COVID pandemic. Gtfo.

        Putting money in the market when it’s a bear usually works out when things turn around.

        Maybe this time will be different and us lazy and patient guys are finally going to be fucked. Anything is possible in this life and no currency or market lasts forever. But I like my chances.

  32. Swamp Weed says:

    Powell said: “A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”

    I like this Powell statement as spin fodder for deniers. “Our aim is to avoid that…” (a lengthy period of very restrictive monetary policy). So there it is, he said it – a not lengthy, therefore short, period a restrictive monetary policy. It can spun as rates will be cut shortly and QE will be rolled out again.

    • Drowningfish says:

      Its not a bad angle actually, of course with it there will have to be steeper rate hikes in the near term

    • Wolf Richter says:

      yes, they will try to twist this in “dovish.” And people with lobotomies will believe them.

    • The Real Tony says:

      “The historical record cautions strongly against prematurely loosening policy”.

      The longer the better. I hope they remember this line in the future.

  33. ian says:

    Excellent review, its why i subscribe!

  34. Depth Charge says:

    I can’t imagine that electronic tulips are going to hold up much longer. How long until ButtCON is down around $1,000?

    • Cyrus says:

      If you are waiting for $1,000 then I think you will be waiting quite some time.

      • Depth Charge says:

        I am not “waiting” for anything, except to laugh when these “coins” go to ZERO – their true intrinsic value.

        • David W. Young says:

          DC, we have a new imported pest here in Virginia named the Spotted Lanternfly that I think Putin dropped by satellite when we were asleep. Of course, he could drop them during daytime over Congress and the White House!

          Since they are so colorful, yet destroy a variety of Virginia horticulture and flora, I am going to encapsulate them, still alive of course, in molten resin and let them start trading on Monday at $10,000 a block. No stink, no mess, no plant destruction. Do I hear a starting bid of $10,001??!!

        • Cytotoxic says:

          That’s not going to happen, and you don’t understand what you speak of. Crypto is absolutely the future. Were you also one of these faux-sceptics who thought the internet wouldn’t matter?

    • Augustus Frost says:

      At $1,000, it would still be 100% overpriced.

      • sageWexford says:

        This is to Cytotoxic above: I was in finance for 45 years, sir, and was a RIA for over 20 years. I know a scam when I see once and that is cryptocurrencies. They do blow up very nicely, though. How are they a Store of Value with excessive volatility??

    • Nate says:

      Tough to say. As long as enough people believe in it, it will be worth something. It doesn’t have any producers with a ton of capacity to go for the final money grab like tulips or baseball cards.

      My guess is that what will kill the coins will be some kind of cryptography breakthrough. Unbreakable codes get broken throughout history and modern crypto has had a great run.

      Even unverified but credible rumors that a major government can break modern crypto probably will kill Bitcoin. Something that the average consumer will have to wait around for a while to have access – like quantum computers or other presently Sci-Fi tech.

  35. Greg says:

    Happy days are here again, finally going to get my 6% to 7% on my CDs. In 2000, I got 8.3% 10 year CDs with all my money.

    • The Real Tony says:

      Wishful thinking, GIC rates did get to 5+ percent in Canada but our worker shortage is out of control. In 1981 I got 19.5 percent on Canada savings bonds but the limit was a joke only 15 grand. I got 12.125 for one year in a GIC in 1990. The insurance limit was only 60 grand then and is only 100 grand now. Big money can only go into the Manitoba credit unions.

    • Augustus Frost says:

      There isn’t enough actual real production in the economy to pay positive inflation adjusted interest rates to savers for any meaningful time period.

      Thye only way to do that is through massive debt defaults to lower the debt burden first.

  36. Einhal says:

    It’s become clear to me that Powell is more concerned with his legacy than anything else. He’s basically the Fed Chairman version of Justice Roberts. He’s worried about how the history books will speak of him.

    That’s why those who said he wouldn’t tighten because it would damage his own wealth were wrong. He doesn’t want his great-great grandchildren reading about how he destroyed the dollar. His net worth is a far distant concern.

    • JeffD says:

      He probably just wants to sneak off quietly and hide in the basement at this point. He was shaking like a leaf when he delived his statement. Watch it again and look at the paper he is holding in his hands.

      • HowNow says:

        I think he’ll be smoking a long cigar at his next appearance, trying to get people to believe that he’s as credible as Volcker.
        The FED does not have, and really doesn’t need, credibility. The market is now programmed to react to words that he speaks, not that they’re true, reliable, vague, specific, or anything else. The market is reacting, on the high probability, that the other market participants will react in a predicable way to the same remarks. Honest and reliability doesn’t matter. Just who’s quickest on the trigger.

    • Wolf Richter says:

      At any rate, his stuff is mostly in bonds, if I remember right (lots of munis). He can just wait till they mature and get paid face value. Very appropriate for a guy his age.

      • Nate says:

        He’ll read his newspaper about the dip and go, heh, got those kids again, while clipping his coupons.

    • COWG says:

      “ He’s basically the Fed Chairman version of Justice Roberts. ”

      If you’re in the bottom 60% of income levels, you might more correctly view him as the Fed Chair version of Jay the Ripper….

  37. RickV says:

    Well, Powell proved he can talk the talk. We’ll see whether he can walk the walk when the going gets tough.

  38. Tbv3 says:

    Paul Volcker wrote in chapter 16 of his memoir “Keeping At It” (2018) that he “knows of no theoretical justification” for a 2% inflation target.

    Here’s the quote:

    “Central bankers are the hosts at the economic party. Too often, monetary restraint—never popular—has been delayed too long. The inflationary process begins and then the challenge becomes more difficult.
    Now, in recognition of the need for discipline, a remarkable consensus has developed among modern central bankers, including in the Federal Reserve, that there’s a new ‘red line’ for policy: a 2 percent rate of increase in some carefully designed consumer price index is acceptable, even desirable, and at the same time provides a limit.
    I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.
    I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices.”

    • Marbles says:

      Wasn’t it Greenspan that came up with that? I have never understood or agreed with that.

      • Augustus Frost says:

        Tha’s because it’s utter BS.

        There is no evidence that 2% inflation optimizes economic outcomes or anything else. Someone just “made it up”.

        What it actually represents is institutionalized theft, a hidden tax which is greater for a noticeable proportion of the population that the taxes they explicitly pay.

        • COWG says:

          Yes sir…

          Soon we be able to thank God and the Fed that inflation is only going up by 2% on the now permanent 30% of the last few years…

          Phew… I feel better already…

          Say, did the IRS tax tables get adjusted up…

          Actually, it could be said that with the value of your money going down, your tax bill with current tax tables has actually risen…

      • FarHills says:

        For those curious about the 2%: it was a central bank of New Zealand (of all places lol) that came up with the 2% inflation target in the 1989. It was actually completely arbitrary!

        Quote from

        “Once the law [that required their central bank to come up with an inflation target – ed] was enacted, though, there was the difficult question of what the inflation target should be. Zero percent? Two percent? Five percent?

        Mr. Brash and Mr. Caygill got a head start on an answer from an offhand comment made during a television interview in 1988. Roger Douglas, Mr. Caygill’s predecessor as finance minister, had been seeking to dissuade New Zealanders from thinking that the central bank would be content with high inflation, and so he said in an interview that he was aiming for inflation of around zero to 1 percent.

        “It was almost a chance remark,” Mr. Brash said in a recent interview. “The figure was plucked out of the air to influence the public’s expectations.”

        • Miller says:

          Thanks, that’s very illuminating. Hopefully modern central bankers are actually paying attention and going back to this history, and how arbitrary and flat dumb the 2 percent inflation target was and is.

    • rbblum says:

      Thank you. Hopefully our paths will cross again.

  39. Xavier Caveat says:

    I was a narrow minded tightening denier, but Jerome will lead us to the promissory note land, I can see it now!

    • BuySome says:

      Chautauqua ain’t dead yet. Come to the tent brothers and sisters. The blind man shall walk again. Just remember…Jesus Saves, but Jerome “Baby Face” Nelson withdraws.-“Oh bankster, Where Art Thou?”. What’s really missing is a revived slogan from the old border wars..maybe “One Twenty Five (bps) or Fight!”.

  40. JoshWx says:

    I find it interesting that yields didn’t pop more than they did – have to wonder if it was an offset of an increased likelihood of more rate hikes vs a higher probability of a recession. 10-year closing at 3.03% is meh. Larger rate moves and a stronger upward trend in mortgage rates to accelerate the housing downturn would probably be the most effective way at taming inflation. 30-year fixed rates of 6-7% as opposed to ~5.5% would almost certainly get that done.

    • Max Power says:

      It will be interesting to see what happens to mortgage rates next month when the Fed finally stops buying MBSs. Although it has reduced its MBS purchases in the past few months, it’s still been buying nearly half a billion dollars in MBSs every business day under the “half-speed” QT regime.

    • Cyrus says:

      10yr has moved from a low of ~2.618 less than 30 days ago. That’s not nothing.

      The volatility seemed to also lead to some bond buying for protection, which pushed US bonds lower even as HYG and corporate debt blew out.

    • Augustus Frost says:

      It’s entirely psychological, not mechanical.

      There is no formula where event “A” causes outcome “B”, ever.

      The real world doesn’t work this way because no supposed “fundamental” event ever bought a single share, bond, commodity, or anything else. If anyone has ever seen it happen, I’m still waiting to see this “Kodak moment”.

      Human beings have agency and can and do acta contrary to how anyone else thinks they “should” and they do, all the time. They aren’t robots.

      If the world did actually work as implied in your comments, this quarter century mania never would have happened because the “fundamentals” don’t remotely support valuations during this period.

      That’s why it’s interesting to read posts here on interest rate forecasts. If the cycle has turned in 2020 ending the 39-YR bull market, rates are destined to “blow out” later, regardless of what anyone including any central bank tries to do about it. It doesn’t matter that we don’t know what supposed fundamentals will “cause” it later.

      No one in 1981 would have imagined that with the weakest aggregate balance sheets and lowest aggregate credit standards in human history (yes, the ones we have now), that interest rates would be the lowest ever with it. No one would have imagined that QE would ever be tried since it’s economically insane, much less that it would “work” and last for over a decade.

      • COWG says:

        “ There is no formula where event “A” causes outcome “B”, ever.”

        You got kids ? …. :)

      • JBrown says:

        Debt monetization is the logical solution to maintain the status quo when the financial system is declining. It’s been done many times, It’s the cause of inflation and collapse of fiat currencies. Ours is no different, the USD has had a privileged status and it’s just taking longer.

      • TheAltonRoute says:

        How much longer till the euro blows up? I’m looking forward to the return of the lira, drachma and peseta.

  41. Ray says:

    Markets will bounce back once it dawns on everyone that he was just jawboning. Reversing the process that reanimated the corpse does not give you a living soul, but simply returns the zombie to the realm of the dead! Powell, the magician skilled in the art of necromancy, knows this, I believe.

    • Wolf Richter says:

      Here we go again, already. Tightening-deniers just cannot stop. It’s addictive all the way to the bitter end.

      • Wisdom Seeker says:

        I try to keep in mind that someone has to own the stocks all the way down.

        AND that it’s difficult for someone to believe something when their payday depends on not believing it.

        So it’s to be expected that the bag holders will be denialists all the way down… and that the denialists will find themselves holding the bag.

        For the rest of us, it’s really this simple: Don’t Fight The Fed!

    • Options Prophet says:

      My theory is that Powell has always been a “closet hawk.”

      He wanted to control a small amount of inflation in 2018 but got massive pushback from the Trump administration. Thus, he pivoted as a political maneuver to keep his job.

      In 2021, Powell publicly claimed that inflation was transitory while creating the largest Reverse Repo Facility in US history. His plan was for this to control inflation in the background so that he could stay popular with low interest rates.

      However, the Russian invasion of Ukraine made this backdoor inflation control impossible, giving Powell the go-ahead to do what he always wanted to do: raise interest rates to save the value of the dollar.

      It’s just a theory I have. I could be totally wrong.

      • SpencerG says:

        I agree with you. The problem that he had in 2018 was he got too aggressive with the tightening. He started raising interest rates AND doing the QT. The markets understood the QT plan… it was announced well in advance and was like a train on a track going from one destination to the next. Everyone could look at the schedule and see if it was on time or not.

        The interest rate hikes were NOT like that. There was no explanation of them… there was no schedule for them… the markets never understood what their purpose was or when they would happen. The Fed screwed itself on that deal. It tried to chase two rabbits and ended up catching none.

    • John Apostolatos says:

      “It’s difficult to get a man to understand something when his salary depends on not understanding it.”

      -Upton Sinclair”

    • Augustus Frost says:

      Let me guess?

      You’re “all in”, aren’t you? In stocks, bonds, and or real estate.

    • Depth Charge says:

      “Markets will bounce back…because that’s what I want and need in order to not lose my ass on my speculative bets.”

      There, I fixed it for you.

  42. BenX says:

    “A lengthy period of _very restrictive monetary policy_ was ultimately needed to stem the high inflation ”

    Turned the money printer down from 11 back to 10.

  43. sunny129 says:

    ‘It was just hawk city’

    Yep. Finally!

    ‘Bounce back crowd’ won’t go away that easy. A couple more 1000 pts to the south needed!

  44. cb says:

    “It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand.

    “None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability.”
    1. Diversionary, rationalizing creep. The inflation is a result of the FED’s money creation.

    2, He talks about FED responsibility after the FED’s continuous irresponsibility. He and the FED are a joke. and thieves.

    • sunny129 says:


      “It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States.”

      TRUE!? NOPE!

      Chinese Bureau of Statistics

      In July 2022 , the national consumer price rose by 2.7% year-on-year . Among them, the city rose by 2.6% , and the rural area rose by 3.0% ; food prices rose by 6.3% , non-food prices rose by 1.9% ; consumer prices rose by 4.0% , service prices rose by 0.7% . On average from January to July , the national consumer price rose by 1.8% over the same period of the previous year”

      Inflation in Japan: CPI inflation excluding fresh food in Japan rose to 2.1% y/y in April from 0.8% in March, slightly higher than consensus of 2.0%. Total CPI inflation rose to 2.5% y/y.

  45. breamrod says:

    Powell was probably short!👍

  46. c smith says:

    Pretty good Volcker impression there Jay. All you lacked was the cigar…

    • David W. Young says:

      CS, all he lacked was the stalwart credibility that Volcker earned over a lifetime of doing what he publicly said he would do. Pretty hard to turn a snake into a cheetah wearing Nikes!

  47. cb says:

    and there won’t be any “stop” or “pause” in the rake hikes until rates are “sufficiently restrictive” to “return inflation to our 2 percent goal.””

    Is Mr. Clown not saying that inflation will be continuous?

    (2% inflation is not rice stability. Why give the double talking liar a pass?)

    • Wolf Richter says:

      Look, 2% inflation is better than 9% inflation. I take what I can get.

      • cb says:

        Yea, we have no choice but to take what those insider master and self serving puppets give us. But they deserve zero respect and shouldn’t be given any, particularly by the non 1%. They bastardize free markets, pick winners and losers and give advantage to those who already have advantage.

        They should be called what they are at every opportunity.

        How are they going to throttle inflation with a 2% inflation target. At best, that just slows inflation. Long term, that just bakes continuous inflation, like we’ve had for several years, in the cake. They are professional liars and deceivers though …….. so …….

  48. Crush the Peasants! says:

    The Forgiven, Part I
    PPP loans.
    Student loans.

    The Forgiven, Part II release date TBA.

  49. trend_setter says:

    I can’t believe it, JPow and the Bailout Boys have finally done something right! I never thought I’d love to see the day :-D

    • The Real Tony says:

      They say talk is cheap I’ll believe it if and when I see action.

      • trend_setter says:

        Oh yeah, I’m totally with you there. It definitely would’ve had a bigger punch if they also did a surprise rate hike, in ADDITION to the one upcoming in Sept. Or just came out and sold some MBS on the spot. But I’ll take a small win when I can.

        Maybe we-phrase to finally SAID something right? What a sad, low bar for those bozos at the Fed, they can’t even get that part down.

        *Meant to type “live to see the day” but i guess it works either way.

  50. Rosarito Dave says:


    I read your response to the possible inflationary pressures caused by the student loan forgiveness perk. After I thought about it for a bit, I came up with a different perspective than you did. Can you tell me where I’m wrong?

    I get that from the Gov side it’s an asset that will be wiped off the books. However one part of this program actual REFUNDS any monies paid back since the initial pause on Mar 13, 2020. I imagine that is not an insignificant total of money being sent to a bunch of folks. That’s free money the student couldn’t expect to get back and is now free to spend.

    Also, as the asset gets written of, so does the liability on the B/S of a lot of students. I really have no idea about what a monthly loan payment these students have, but for argument’s sake, let’s say $200/mo. I would think that these people have some sort of budget for that expenditure. Now this $200 that was being repaid every month becomes extra discretionary funds to be able to spend more freely than before.

    Both of these situations, I believe, can’t help but add more money being spent and therefore more inflationary. I look forward to your reply.

    By the way, I came across your site about 3 months ago and you have become my favorite, critical thinking analyst of what goes on in the economy and the markets.

    • Wolf Richter says:

      “…actual REFUNDS any monies paid back since the initial pause on Mar 13, 2020.”

      That’s close to zero because everyone stopped making payments when the loans went into automatic forbearance. It’s very small amounts. You can just forget that part.

      In terms of the loan payment: as I said, no one was making payments, they were all in forbearance, and the current status quo is “no loan payments through Dec 31.” Maybe loan payments will begin again in January, and then the forgiven amounts will not trigger loan payments, but these “loan payments not make” get spread over 10 years, so the amount saved in payments per year is pretty small given that we have a $24 trillion economy. So in terms of inflation, this just isn’t going to have any impact from where we are now (no loan payments for everyone!).

      • Just Joe says:

        I’ve been thinking a lot about the “no payments until December 31st” thing.

        Somewhere around 40 million people will suddenly lose 5-10% of their income to the repayment plans. Is the economy going to be strong enough four months to be ok with a 2-3% drop in consumer spending?

        I’ll admit that number is one I estimated, I don’t know how much the impact will be. I’m surprised no one seems to be acknowledging that it is baked in.

      • Rosarito Dave says:


        Thank you for your reply. After reading it, I decided to do some research on your statement…’ In terms of the loan payment: as I said, no one was making payments, they were all in forbearance, and the current status quo is “no loan payments through Dec 31.”

        Like you, I try to find some source data before doubling down on a fact or opinion I have. In that regard, I found the following source (WITH CHARTS lol). It is from the Fed Reserve itself dated 5/27/22

        The pertinent sections states…
        As to the eligible Fed loans…‘in all, this group is composed of about 20 million borrowers, holding $725 billion in student loan debt, just below the $760 billion reported by the DoEd. Prior to the pandemic, this group was required to pay about $5.3 billion a month toward their student loan debt. At the borrower level, the average and median required monthly payment were about $260 and $170, respectively.
        Among these borrowers, almost 60 percent (about 11.5 million) have not made any payments on their student loans from August 2020 through December 2021 , and it is possible that some of these borrowers may not be ready to resume payments once forbearance expires.7 These borrowers hold almost $400 billion in outstanding student loan debt and, prior to the pandemic, were required to pay about $2.8 billion a month toward their student loan debt.”
        Here’s the section that (I believe) differs from your reply….
        ‘In comparison, the remaining borrowers (about 8.8 million) made at least one payment since August 2020, and they appear much better poised for government-mandated forbearance to expire.8 For one, their payments led to a $52 billion (or roughly 15 percent) decline in their student loan outstanding balances over the two-year period ending in 2021:Q4’ **

        ** As there was no interest charged during forbearance, ALL the payments were applied directly to principle.

        I don’t know if these #’s move the needle at all from your point of view (the dollar amounts that are thrown around these days boggle my mind and to be honest, I can’t wrap my head around what is material and what may not be). My limited guess is it has to add at least a little fuel on the fire…


        PS One thing I admire about your site is there is no requirement for paid membership. There are no ads and you get by through the folks who voluntarily donate to show their appreciation of the site. But you still interact the same with people who donate or not.

        Saying all this, I decided after 3 months of reading to become part of the group who donate!  So DO I still get a mug?

        • doug says:

          You can turn off your ad blocker and see ads. and the site gets revenue. They can be fun to see what is served up.

        • Lili Von Schtupp says:

          I’d imagine late fees and other penalties will certainly in some way offset some of the lost revenue, especially if the economy tanks, because student loans have some strict penalties. Sure they were baked in before, but students were getting fleeced on these loans. Very curious what Servicer reforms will push through if any.

          I discussed this before, in error: Navient tacked $20g’s in administrative penalties on my loans. I reviewed them yesterday because in the haze of some very difficult years (decades, really), I thought the penalties were due to servicer sales from two defaults, and it seems I had indeed defaulted–but only once, leading the Mountain-whoever servicer to sell to Navient and Navient added a $10k servicing penalty to my loan balance. Ok fine, my bad I own it. But the second I went back to school and deferred my then-in good standing loans (as many students do), Navient apparently hit my balance again with another $10k servicing fee, because why not.

          Which, may be one of the reasons why they were quick to jump ship: pressure hit them for their shady servicing practices. But assuming it all was legit, that’s $20k + interest and future fees right there that the taxpayers hadn’t loaned me (initial loans were $18k–add $4k for the attemp to return to school just before the pandemic hit). Even if my default penalty was deserved, $10k for deferring for school is beyond excessive and questionable. Now that I can finally breathe and sort it out, I’m looking into the matter.

          While perhaps my situation was not typical, that’s part of the issue with student loans– they’ve been a bad contract through and through for many, especially for people who paid on time (through the nose) and never defaulted yet never recieved the agreed PSLF, etc. The bankruptcy situation was grossly unfair for many. Anecdotally there’s plenty of stories of added fees, penalties, drowning interest. If that is what was baked into the tax payer’s asset, it certainly exceeded the initial lending terms for many borrowers and the tax payers were set to be getting a pretty sweet return on their money for a long time, on paper anyway.

          I’d be more curious how much the tax payers’ asset would have been worth if loans were serviced as contracted all these years, without the corruption and red tape preventing rightful discharges.

          Also, 110% agree with your PS to Wolf, Rosarito. I’ve learned so much through this site about the real economy, money, business. As soon as I’m not drowning in Navient’s servicer fees I’ll gladly chip in a few bucks. If for nothing else for putting up with my comments (taking to heart his comment guidelines post) but mostly for the excellent information he provides so eloquently.

  51. kpl says:

    “And today Powell, in clear and precise language that would be hard to twist into anything different, pulled the rug out from under the remaining tightening-deniers.”

    He could have done this at the last press conference.

    It looks like Powell got the message that unless wall street is told in no uncertain terms that it will raise rates and it will not pivot, wall street will not get the message.

    If he had made a wishy-washy speech yesterday like the last press conference, the Fed would have lost control as the market would have screamed higher and would have had to go for a mid-meeting rate hike or 100 bps at the next meeting. This is the reason for our “dove man” entering the hawk city.

    • Pea Sea says:

      He had to use this “clear and precise language” because of his screwup at the July press conference, when his imprecise and wishy-washy language gave already deluded markets an excuse to go into hyperdelusion.

      The Fed in general is terrible at learning lessons, but they seem to have learned this one: if you expect your messaging to transmit tightening to these markets, your message has to be unambiguous.

      • Wolf Richter says:

        There was nothing imprecise or wishy-washy about his FOMC presser. It’s just that the tightening-deniers twisted a couple of statements around and took some stuff out of context.

        They’re already at it again, doing the same thing to his speech.

        • kpl says:

          The Fed can stop these deniers in another way.

          1) raise rates more than the deniers think it will
          2) raise rates in-between meetings

          Let us see how many deniers are around after that.

          When you have inflation at 8.5% and rates at 2.25% and talk for ever about raising rates, it tells everyone that you are timid about raising rates. Talk is cheap. Follow through needs courage. When the Fed has been coddling up to the markets for more than a decade, how do you expect markets to take it seriously all of a sudden.

          The Fed could do with some psychology classes if it does not know how to communicate.

  52. Poilievre says:

    Think the Bank of Canada will follow the Fed this Fall, or will they listen to the realtors who are crying out that higher interest rates are making them lose more commissions due to lower borrowing power?

    • The Real Tony says:

      .75 percent in September. Home prices have barely fallen out west in British Columbia.

      • Dazed And Confused says:

        That’s odd. House Sigma reports that:

        Vancouver’s median home price fell by 13.6% — from $1.063 million in February 2022 to $918,000 in July 2022.

        Isn’t Vancouver in British Columbia?

  53. ben says:

    Love the analysis today. As Wolf points out the bond market had pushed 10yr to 3.05 to 3.10 since early August and yet the stock market while pausing actually went up yesterday. I think volume has been very low. Will see what happens after labor day when folks get back from vacations. As mentioned by several folks here liquidity in the system is key and the banks play a role in that.

    • David W. Young says:

      Ben, I think the bond market has just been going through a correction, an event as rare as an honest politician these days, and the hucklebuck in yields of the last month plus are merely that, no anticipation of a Hawkish Fed Chair Shaky Eddy speech or any chicken entrails either. Normal functioning markets go thru 10% corrections all the time. But a Fed manipulated market in either debt or equities is highly speculative with the 14 year old Fed Put, and the Fear Of Missing Out crowd piles in at every negative move in the asking price.

  54. Trucker Guy says:

    For people to still be denying tightening, the fed must have really burned their bridge with people faith given their turn on the taper tantrum of yesteryear and all the easy money during the pandemic.

    Guess it’s stating the obvious but I wonder how long it’ll be before the markets stop fighting the fed and get the message through their head.

    • Pea Sea says:

      They have no one to blame but themselves. Fourteen years of coming to the rescue every time asset and equity prices stumble isn’t something you can magically make people forget about with some tough talk.

      • HowNow says:

        Pea Sea, yes, yes and no. People magically forget constantly. Tough language works for about 24 hours. Now, everything is new again. “Siri, where did I leave my keys?”

    • 91B20 1stCav (AUS) says:

      Trucker-certain drinkers at a previously open bar reacting to the act of being being charged/cut off as a catastrophe, their previously unchallenged existence as barflies having become their article of supreme faith…

      may we all find a better day.

  55. Peachy says:

    Tightening-Deniers will not change their mind until Powell actually delivers on what he is saying.

    • Wolf Richter says:

      Correct, they will not change their mind, but they change their theories as needed.

      “…until Powell actually delivers”

      He already did 1×25, 1×50, and 2×75 in just a few months, with more to come. Tightening-deniers early this year had said that the Fed is “trapped” and would never raise rates or would do “one and done.” They have been wrong every step along the way, and each time they change their tune and their theory.

      • Crush the Peasants! says:

        Debt forgiveness wealth effect? (In the aggregate.)

      • RickV says:

        “He already did ….”

        I would point out that the real rate of interest (Fed Funds – July annual CPI) is still negative 6.25%. So, unless the CPI collapses, the Fed has a large number of rate increases in its future to achieve a positive real interest rate, which I would argue will be necessary to finally quell inflation.

  56. AD says:

    The S&P 500 has been on a tear since it sank 23% approximately from its all time high and 52 week high recently.

    With a greater percentage of people investing in the stock market as compared to 2000 and 2008, this volatility is not surprising.

    The younger generation especially today is more actively trading than in the 1990s and 2000’s.

    So bear markets are a lot more short lived as compared to the distant past.

    And it did not have any effect on stock buyer enthusiasm given the Fed Funds rate is very likely going from 2.5% now to 3.25% next month. That is why I hope they continue the rate quickly to 4% by Thanksgiving.

    I am not sure if Powell wants to change that out of fear that another quick run up is going to cause inflation. The run up recently almost is all unrealized gains and paper wealth anyway.

    It’s not exactly the same as giving out stimulus checks, generous unemployment, PPP loans, and canceling rent.

    • Wolf Richter says:

      The other point of view is that this was a summer rally, a classic bear market rally, that ended on Aug 16, with the S&P 500 having since then dropped nearly 6%, down 15% YTD.

      During the dotcom bust, which the “younger generation” you cite didn’t experience as adults, the Nasdaq dropped 78%, starting in March 2000. But in the summer of 2000, the Nasdaq rallied 35%, without ever getting back to its March 2000 high. A huge and now classic bear-market rally. For two months, from mid-May through mid-July, we thought the bust was over, and it’s party time all over again, and lots of people plowed their money back into the market and then got wiped out when stocks collapsed entirely. From the low in Sep 2002 (Nasdaq -78%, S&P 500 -50%), it would take the Nasdaq something like 12 years and lots of money printing to get back to its March 2000 high.

      • David W. Young says:

        Great history lesson, Wolf. Me thinks you are spot on! Sure you don’t want to throw your hat in the ring for 2024??! At least we will know that you stay awake and do work some 18 hours of every day!!

      • jon says:

        Nothing goes up or down in a straight line.
        We’d see a lot of small bear market rallies.. some days up , most days down.

      • Randy says:

        Value funds and small cap funds held up much better than growth/tech and large cap during the tech, internet bust.

        Great Recession: nothing held up. Well I suppose some obscure part of the market might have.

  57. notdeadyet says:

    Inflation makes our dollars worth less.
    Q: So who experiences the greatest loss when dollars are worth less?
    A: Those with the most dollars, of course.
    Q: Who has accumulated the most dollars?
    A: Not the American Worker… that’s for sure.
    Lets not fool ourselves. This Powell Dog and Pony Show is designed to protect and enrich the very wealthy by stabilizing the value of their accumulated wealth and increasing the interest income which flows from much of it.
    As for the American Worker… they can expect greater unemployment and lower wages…(Powell freely admits this is part of the fix) And this, of course increases the benefits to the wealthy who can enjoy lower out of pocket costs for labor.
    Not to worry… The American Worker is well distracted by many of the social and political side shows going on at the same time.
    Same as it always was. So what is the remedy to all this? Ben Franklin told us when he designed one of the first United States coins (Fugio Cent) and it tells us: Time Flies. Tend to your own business.

    • Augustus Frost says:

      The actually wealthy, as opposed to the middle-class multi-millionaire who isn’t actually rich, isn’t financially impacted by the type of inflation you describe. It’s a rounding error to them because, even though the purchasing power of their assets is decreasing noticeably, the actual dollars needed to maintain their lifestyle isn’t materially impacted by it. They won’t be substituting chicken for lamb chops any time soon.

      The typical US median income household on the other hand, is hit hard. Most aren’t actually “middle class” with an income of about $70K but the “working class” or “working poor”.

      Their living standards are going to decline with tighter credit conditions, but it would have happened anyway without such ridiculously loose monetary and fiscal policy anyway. The country isn’t actually rich enough to support current consumption and living standards without perpetually increasing debt. It can’t be supported either through a mass redistribution of fake “wealth” caused by the asset mania.

      • Einhal says:

        I don’t know why more people don’t get this. I’ve heard people say, for example, “If you distributed the trillionaires’ wealth to every American, they’d have thousands for education and other necessary expenses.”

        The problem is that the trillionaires could not actually liquidate their holdings and buy stuff with it, at least not without causing the prices of that “stuff” to skyrocket.

        Ultimately, “wealth” is just stored buying power. And the “wealth” that exists in assets can’t buy anywhere near the goods or services its nominal numbers would make you think.

        • Augustus Frost says:

          It’s for one of two reasons.

          First, most people are economically illiterate. They don’t understand that wealth for the individual isn’t always (and in developed countries usually isn’t) the same as aggregate wealth for an economy.

          They don’t understand that only actual production, goods and some services, makes an economy wealthier. They think that growing balances in everyone’s bank account or brokerage portfolio means a country is richer.

          Second, believing something else is contrary to their personal preference. They are populist demagogues motivated by politically compelled income and wealth redistribution.

      • Nate says:

        I multi-millionaire is not middle class. Setting aside age, that easily is in the top 10% and probably cleared somewhere in the top 5%. They are still on a different planet from the very top, but are not the new middle class.

        That’s average net worth too not taking account age and getting skewed by the rich elites at the top 1% or .1%. If you look at medians and age, a multi-millionaire should be punched in the face for trying to claim middle class status (usually with his hand out for some free government money). Median net worth when people tend to be at their heights of wealth accumulation is around 300k.

        • Augustus Frost says:

          Someone who qualifies for the minimum as a multimillionaire with $2MM is not rich, not even close to it in 2022.

          They aren’t the typical middle class household most Americans have in mind but that’s because most of the supposed American “middle class” isn’t actually middle class. Being around the 50th percentile or even noticeably above it doesn’t make anyone actually middle class. It’s a meaningless statistical abstraction which doesn’t correlate to their actual financial circumstances.

          Having several million sounds like a lot of money but it really isn’t given the inflated prices from the asset mania (such as for housing) and general cost of living. Ranking above some arbitrary percentile like the top 10% or whatever doesn’t mean someone is actually wealthy.

          The difference between today when someone in the top 5% or 10% is generally considered “wealthy” and the past under “normal” financial conditions is cheap credit and basement level standards. The US has had that most of my life and I’m 57.

          Someone with the median household net worth (which is closer to $150K) and household income (about $70K) isn’t technically poor but depending upon their household characteristics, not really far from it.

          It’s subjective but I’d estimate that approximately 20% of American households or somewhat more are actually middle class or above economically.

          This will become evident as credit conditions tighten, asset markets fall hard, and employment once again becomes less secure.

        • Seen it all before, Bob says:

          If someone made 70K in 2012 and purchased a house for 500K, and now the house is now worth 1.2M, does that make them part of the rich? Especially if their wage income hasn’t risen much?

          They are probably not eating lobsters and steak every night but they are more willing to spend.

          As Augustus said, this may be fake wealth if the house value plummets 50%.

          If they took a HELOC out for 700K and now have the money in cash, does that make them part of the rich?

          It does if they are willing to walk away from their home if prices fall.

          Strange situation.

      • Randy says:

        I was a software and test engineer until 1996. Could not obtain work in the field thereafter. Have lived off of savings, make about 15k to 20k per year.

        People constantly talk like 50k or even 70k (!) salary is hard to live on. Maybe if you have a bunch of kids, or large health expenses or a mortgage on a very expensive home.
        But 70k to me would be a lot of $. A lot !

        It would be a lot of $ to a whole lot of folks who currently make 15k to 35k.

        People complain about the 1% (super rich) ad nauseum. The lifestyle difference between someone who makes 20k and someone who makes 200k is probably greater than
        that of someone making 200k vs. 2M.
        This i believe is true even though obviously
        the absolute difference in income is greater in the latter case.

        Its all about DISCRETIONARY income… something not nearly discussed enough IMO.

  58. R2D2 says:

    Looks like J-Pow is trying to talk the market down and rein in inflation with words, not hikes.

    Leading inflation indicators today for the US are already tumbling. For example, yesterday’s monthly PCE Price Index for July 2022 plunged from 7% to 6%.

    Inflation is on the way down.

    • butters says:

      I think the decline is transitory. It won’t be long before oil goes to 100 or above and stays there.

    • Wolf Richter says:


      “Looks like J-Pow is trying to talk the market down and rein in inflation with words, not hikes.”

      The hikes were real: +25, +50, +75, +75. And the future hikes will be real too. And QT is real too.

      Inflation has a nasty way of bouncing up and down, and giving off lots of false signals and surprises along the way — I’ve been calling it the game of inflation Whac A Mole — which we have already seen some of in this cycle. And the Fed is painfully aware of that and is trying to not be fooled by these fake downs, if you read Powell’s speech.

  59. The original Marco says:

    I have to say congrats Wolf , you have been right when many have so far have been wrong on this Interest Rate situation but do you think approximately 4% Interest Rates will be sufficient to get the Inflation under control ? Thank you and kudos

    • Wolf Richter says:

      The original Marco,

      In an interview back in April or May 2021, I said that with enough QT, the Fed will likely not have to raise rates as far as Volcker did to get inflation under control. QT is a VERY powerful tool, and if the Fed uses enough of it, the Fed can accomplish a lot. QT hits the wealthy, and they can handle the hit far better than the lower 70% on the income/wealth spectrum. And back then I said that 4% might be enough to get the job done, along with enough QT.

      Since then, inflation has surged a lot more than I expected. I think this inflation will dish out a lot of surprises. For the past few months, I’ve been saying that year-over-year CPI will likely dip in the second half of 2022 and will likely bounce again in 2023. That’s the scenario I still see.

      It may well be that 4% will not be enough. But it’s too early to tell. QT just started, and full speed will kick off in September, and this is going to do a lot of the heavy lifting. So we’ll see.

      • JeffD says:

        There is a Fed report saying that the $95 billion/month for a year will be roughly equivalent to a quarter point hike. Personally, I am eager/fearful to see the net effect on MBS, which will really only start showing up after September. Could be nothing or could be huge. There is a potential for a cliff thrsshold to be crossed, where the Fed will be making absolutely no purchases of MBS, which is not the case yet.

        • JeffD says:

          The Atlanta Fed article/report was authored by Bin Wei.

        • JeffD says:

          Whoops. 0.5% net effect. I read it a month ago and forgot the particulars discussed.

        • Wolf Richter says:

          I didn’t read the report. Did they mean, a half point per month? Or per FOMC meeting? Or for the entire duration of QT?

        • JeffD says:

          The article is a short summary with essentially no math. The assumption is that $2.2 trillion of Treasury bond rolloff QT occurs over three years (MBS ignored), and in that case, the author sees an “orderly market” EFFR equivalent of 29 basis points throughout the period, and a maximum “crisis” contribution of 97 basis points. The maximum “crisis” impact on the 10 yr Treasury rate is 12 basis points over the period. Note that this author claims his numbers come in much higher than others who have done similar analysis, so this should be conservative.

        • JeffD says:

          Sorry. I got the conservative part backward. With respect to 10yr Treasury yield impact, this report has a much lower estimate compared to other authors. The article is so small, it takes less than five minutes to read, so anyone interested should take a look rather than rely on my game of Telephone.

      • The original Marco says:

        Thank you Wolf. It does make you wonder why they did not start the QT earlier ?

        • Wolf Richter says:

          They should have never done QE to begin with, starting in 2008. They could have used repos for a month or two to calm down the Treasury market and then walk away and let markets sort it out.

      • RickV says:

        “QT just started, and full speed will kick off in September, and this is going to do a lot of the heavy lifting. So we’ll see.”

        Wolf, I have been thinking about this, and have a question. Will the Fed’s RRP facility offset any liquidity tightening from QT, or will the RRP interest rate just go up to reflect current Fed funds rate?

        • Wolf Richter says:

          RRPs are demand-based. QT will dry up liquidity which will dry up demand for RRPs, and so they will decline. Same with reserves. It’s already happening with reserves.

  60. Johnny5 says:

    The tightening-deniers will continue to cycle through the 5 stages of grief for the foreseeable future. Most are still in the bargaining stage at the moment (e.g., the WSJ article on transitory Fed talk). This is a very traumatic experience for them, so acceptance will take time. We’re going to have to be patient while they adapt to this new reality of restrictive monetary policy.

    When Cramer ups his anti-depression medication, that’s when we’ll know they’re close to acceptance.

  61. Rusty Blade says:

    S&P 500 Futures = Racketeering & Fraud

    The S&P 500 Futures contract has NOTHING to do with the 500 stocks which it represents. The underlying 500 stocks do not get bought or sold when the S&P Futures contract is itself is bought or sold. The value of the S&P Futures contract is wholly independent of the value of the 500 stocks of which it is comprised. You could buy or sell 1 million S&P Futures contract and NOT ONE single stock included in it will get traded concurrently as a result.


    Before the stock market opens, the S&P Futures contract already trades in the so-called premarket trading platforms at about the same price where the 500 stocks comprising it will open at the start of the regular trading hours.

    This fact is PROOF that the bankers can see, and know, where you placed your stock buy & sell orders before the market opens, and are trading Futures contracts based on this insider information EVERYDAY of the working week = Fraud & Racketeering

  62. Xaver says:

    Powell did a lot of talking so far. I am not impressed. What about QT?

    He was raising rates too late and not high enough to be worthy mentioning Volcker. He will not fool me for sure. He will not control inflation.

    Assets may come down, but daily life prices will continue rise.

    How much did the S&P drop during Volckers time? Now the S&P dropped 16% from ATH so far.

    • Augustus Frost says:

      Depending upon how measured, the US stock market was in a bear market in nominal prices from February 9, 1966 to a double bottom in December 1974.

      Measured in real purchasing power but depending upon the index, stocks bottomed sometime between 1979 and 1982. August 13, 1982 was generally the considered the beginning of the 80’s bull market and the end of the 16-year bear market from 1966 but it wasn’t the price low during this period.

      By the time the FRB started raising the discount rate (which was the primary rate at the time), stocks were already historically cheap.

      You can’t compare then to now, because there was no mania while we are in the biggest one in human history, yes right now.

      • Xaver says:

        Thank you! It sure is hard to compare. I only started to invest in the 80s, call me lucky.

  63. breamrod says:

    QT ramps up in Sept. This should suck liquidity out of the system( markets). Eventually the June lows will be broken unless they figure out a way to cheat. Wolf will keep us unto date on the QT.

  64. Random guy 62 says:

    I think the fed moves are working at slowing this overheated economy, which they caused in the first place. Our economy is a big ship and it just moves slower than we might like to adjust.

    There are a lot of people pointing to record business profits as corporate greed. To me that’s silly. Businesses always want to charge as much as possible but they are not able to without losing sales because of competition. Raising prices without losing sales is the most wonderful business situation ever for a manager/owner. It’s basically free money. We will do it any chance we can.

    In the long term, competition forces businesses to compete on price, which helps hold down inflation. But in the short term, industry capacity is a constraint. With all the overstimulus of the past two years, demand for many products far outstripped supply, so businesses saw a short period of time where they could raise prices without losing any sales. Entire industries like steel, shipping, and semiconductors were pushed to the absolute max of their capacity and they took the opportunity to make big money.

    Much of that wild demand was a result of real purchases by end users. And plenty more of it was “just in case” on behalf of company purchasing policies. Either way, all signs point to it being behind us now.

    In our business (truck equipment), demand far outstripped capacity – for us and our competitors- since early 2021. So we all jacked prices up to cope with skyrocketing input costs and customers just paid it. Very few complained…they just sent the PO. Now we are starting to see that turn. Input costs are falling, and demand for our products is cooling. I suspect we will end up fighting for business once again, and discounting, eventually to give back about half of the 30-50% price spikes that occurred in the last 18 months. On current trajectory, that correction will probably start for us this Q4, and definitely by early 2023. No crystal ball here. Just gut feeling, and some visibility of steel futures.

    While things have softened some, we are still burning through record backlogs propelled through the roof by the “gotta have it now” mentality of 2021.

    All that said, we were NOT on the winning side of the cost/price moves of this cycle. Costs rose much faster than we could raise prices. For that reason we are hoping for that proverbial “soft landing” to let us recover some of the margin lost in 2021 on the way down. They say prices rise like a rocket and fall like a feather. IMO the feather just dropped.

    As long as the feds stay the course, this inflationary thing will end up being short lived. But that is not letting them off the hook for the damage they have done along the way. They caused this mess and they seem to be trying to fix it. The whole supply chain mess and inflationary spike could have been avoided by not throwing so much money around in the first place.

    • David W. Young says:

      Thanks, Rg62, always highly informative to hear from a live and kicking businessman in the trenches! Far superior to editorialized pablum that comes from the slanted media and government agencies.

    • Martok says:

      Random guy 62 – that was a very good and real analysis of business, and hopefully your profits will hold your business into 2023 and beyond.

    • COWG says:

      “ As long as the feds stay the course, this inflationary thing will end up being short lived”

      Unless you’re going to be on the leading (bleeding) edge and dropping your prices and wages back to Jan 2019, I don’t think you can stand by that statement…

      This “inflationary thing” will not be short lived… Inflation (CPI-W) since Jan 2019 has been 19.2%… and probably undercounted by a bunch…

      Indeed, it will be with us forever… along with more…

      Not picking on you personally, but I don’t think people take the inflation cancer seriously enough for the long term… especially for the lower 70% of people, many of whom have zero inflation protection for their wages and salaries…

      We damn sure know Powell didn’t…

  65. CreditGB says:

    From out here in the hinterlands, the “demand” for many things and services has dried up completely.

    The low and spreading quickly up the middle incomers are being tapped out by the massive cost increases in major budget items. They are increasingly selectively buying only that which is required to sustain life and shelter. Low earners can’t even cover those.

    I can’t imaging the Fed members have had any such experience in their entire lives.

    So along with demand killing inflation that is already choking the consumer, these folks are now going to apply a choke hold to them as well?

    That ought to work out well for the consumer, don’t cha think?

    • HowNow says:

      CreditGB: I think you’re absolutely right about the disconnect between the FED and its officious, insular economists, generally, and the people on main street. Mad Hatters.
      Earlier I posted points made by Robt. Shiller (2009) about his discovery (2005) that no one at the Fed (a single analyst is the exception) communicated anything regarding a housing bubble up through that year (’05). In fact, Shiller mentioned that his interest was due to a taxi driver bringing the craziness of lending and house prices to his attention! For the FED to have shown no concern about the liar-loan phenom. that was rampant preceding the financial collapse, is beyond insular, it’s malpractice/incompetence/delusional/hallucinatory.
      Is Powell (the FED) going to get it right?
      Yes, “it’s different this time”.

  66. dishonest says:

    It’s clear that many of you cynics don’t believe Jerome is up to the disciple to do what it takes. I do not either.

    A more likely scenario is a bit of tightening, followed by some financial shenanigans when the going gets tough.

    I like the previous term for the form of witchcraft that is of interest to this site, id est, political economics. I’ll stick to STEM and sink with the rest of you. There can be no good ending that comes from what we are seeing.

  67. Young says:

    How much capital is needed to trip the SP circuit breakers at the market open via future contracts two days in a row?

    If I had that kind of play money, I would love to test Fed’s resolve next Friday after employment report and Tuesday (after long Labor Day weekend) to see if the emperor is naked.

  68. nick kelly says:

    David Rosenberg, writing in Friday’s Aug 26 Globe and Mail (on stands Friday AM, before sell off) advises: ‘Play a long game while market rally unravels’

    He thinks the market’s bottom could be two years away. He says: ‘Think 1973-75, 1980- 82, 2000- 2002, 2007- 2009.’

  69. Scott says:

    I’d like to hear Powell comment on the Biden administrations continuing efforts to stimulate the economy through student debt forgiveness and EV credits in the face of runaway inflation. It must frustrate him to no end as his tightening efforts will have little effect while politicians hand out freebies in the hopes of getting votes.

    • Wolf Richter says:


      Student loan forgiveness will do nothing to inflation. These borrowers don’t get any money at all. They just don’t have to pay back all of their debts. That money was spent YEARS ago and is down the drain, and it won’t do anything to inflation now. It is the destruction of a taxpayer asset though, and taxpayers got screwed, that’s all it is.

      In addition, there borrowers haven’t made ANY payments since March 2020, and won’t make any payments at all till Jan 2023. And then they have to make payments on the remainder of their debts, and that will actually LOWER demand for stuff that they can no longer afford to buy. So this may push down inflation a little.

      But I agree, the $50 billion that Congress handed to the chip makers, and the EV credits and infrastructure bill etc., that’s money that will get spent, and it will contribute to inflation.

      • Jm says:

        I just read that the cost to the Treasury will be only $24 billion per year.
        For comparison, the recent 20% rally in the stock market was said to have added $7 trillion to stockholders’ net worth. So contemplate how much was added by the full rise of the ratio of the Wilshire 5000 to GDP (Warren Buffet indicator) to 200% at the recent market peak from about 60% at it’s low in 2009, or even from it’s rise later to from it’s historical average of 80% of GDP. About $30 trillion. All thanks to Fed QE. On top of the rise in the stockholders’ home values, and the money they’ll not have to pay on their mortgages for many years into the future, since they all refinanced them at under 3% during While small savers got ZIRP on their bank accounts.

        • jm says:

          Grrrrr. All those “it’s” where I typed “its. Thanks, autocorrect.

        • Cas127 says:


          Not just small savers got expropriated.

          Essentially everything in the fixed income universe directly or indirectly gets priced at a spread to “riskless” Treasuries of roughly the same term.

          I would say that 20 yrs of ZIRP repressed Treasury rates at least 3% below what a free, unmanipulated mkt would have required.

          So if the USD fixed income universe averaged $30 trillion over those 20 yrs (a bit of a wild ass guess but somewhere in the ballpark, +/- maybe 10 trillion I think) then *every year* $900 billion was redistributed (via ZIRP) from savers/creditors to debtors (including, your pal, the G).

          ($900 billion = $30 trillion FI base x 3% interest rate gut)

          Multiply times 20 years and the transfer to debtors (including leveraged speculators and the mad printer G) is $18 *trillion*.

          How do you think grotesquely misfought wars and kleptocratic domestic policies get funded in a slowly dying country with an evaporating real economy?

      • Rosarito Dave says:

        Wolf, I posted a response to your reply to me earlier regarding your statement “In addition, these borrowers haven’t made ANY payments since March 2020, and won’t make any payments at all till Jan 2023. ‘
        I don’t know if you read it or not but after seeing you repeat this above, I figured I’d try again to get your thoughts on the info I posted from the Fed Reserve themselves dated 5/27/22 where they reported the following…
        “the remaining 40% of borrowers (about 8.8 million out of 20 billion) made at least one payment since August 2020,….. their payments led to a $52 billion (or roughly 15 percent) decline in their student loan outstanding balances over the two-year period ending in 2021:Q4”

        Now I don’t know how much of $52 Billion in loan payments are qualified to be refunded, but I would imagine it’s a substantial majority of it.

        As I mentioned in my earlier post I have become a big fan of yours over the last 3 months, both for your quality insights and the back and forth you encourage here, as well as the no advertising policy you have while getting by on donations. In fact I just qualified for a mug from you (Are they still available? lol)

        Maybe you just haven’t had the time to respond, but I’m hoping that the lack of a reply is not because I challenged your statement with factual source data… as I mentioned I haven’t been here that long and am not sure of how you do that sort of thing.

        I’m hoping to hear a reply. Thanks in advance.

        • sageWexford says:

          Keep plugging, RD. You may not get a response from the Wolfmeister, since he works an 8 day week, but your comments, in my not-so-humble opinion, are informative. I ain’t buying the no inflation argument of taking the Debt Monkey partially off of a former student’s shoulders. We will call it the Forgiveness Wealth Effect since an increase in Net Worth in America gets the credit card out and the SUV headed for the malls!

      • FinePrintGuy says:

        My suspicion is that most of the student loans were packaged into securitized debt, ABS, insured by the USG. How will this affect those ABS? Will the treasury borrow that money and cram it down the ABS waterfalls in one go, or trickle it out over time? Repayments from colege grads were recycled into new loans, but that source is going to be curtailed. In any case, it spells a hightened level of borrowing and greater budget deficits in the medium term.

        • Wolf Richter says:

          Many private student loans were securitized. But these federal student loans are carried as an asset on the balance sheet of the US (called “Loans receivable, net” = $1,651 billion), and it’s the largest financial asset on the balance sheet, ahead of “General property, plant and equipment, net” (=$1,177 billion), and a portion of this largest asset of the US government (taxpayer) is now getting destroyed, and the rest has been put into doubt. Click on the link to the US government balance sheet and scroll down a little, and you’ll see it:

      • notdeadyet says:

        Student loan forgiveness may not have any effect on inflation… But the Student Loan Program itself certainly has had a tremendous effect on inflated college tuitions.

        It has been a half century since I was of college age and I have watched the cost of college education sky rocket in the years since then. And what was the cause of this great multi-decade college tuition inflation? Could it have been low interest and easy to get taxpayer subsidized student loans? It would certainly seem to correlate.

        In the real estate market, when we see a proliferation of low interest and easy to qualify mortgages, we also see a corresponding rise in real estate prices. Should these economic principals change when we make loans easy and plentiful for secondary education?

        While colleges, themselves have certainly played a role, we can’t make them out to be the bad guy. More money makes more things possible; Like better facilities, larger staffs and better salaries to attract better instructors… And of course, more money provides plenty of wiggle room for lots of waste.

        More money is always better. And who can blame the students for paying exorbitant college fees, when the loans seem to be low cost and they are easy to get? And who cares what this costs, when we are all kicking that can down the street?

        Sooner or later, one runs out of street and the can comes to rest and the chickens come home to roost. There are many problems with American College Costs. And the answer is NOT continued taxpayer subsidized college loans. We already know where that takes us.

        • Wolf Richter says:


          Totally agree with your statement: “But the Student Loan Program itself certainly has had a tremendous effect on inflated college tuitions.”

          Student loans have been the big enabler. I have been lamenting this for years. This is an insidious triangular relationship, where the entity that borrows the money (student) is just the conduit from the lender/guarantor (taxpayer) to the entity that profits from it (educational-industrial complex). This is the type of public-private “partnership” where everyone but the receiving company gets ripped off.

        • JeffD says:

          Highest Average Student Loan Debt per Borrower

          1. Washington, D.C. ($55,508)
          2. Maryland ($43,619)
          3. Georgia ($42,207)
          4. Virginia ($39,892)

          Enough said.

  70. Joseph says:

    Wolf Richter

    Thank you very much for your efforts , your thoughts and insights.

    I would like to emphasize one ironic point :


    ” Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s ”

    It’s really ironic ,

    Would we be in this situation to begin with if they have actually learned anything from past economic conditions , that led to the “high and volatile inflation of 1970s & 1980s” ?!

    • Marbles says:

      Ha! You weren’t supposed to catch that. The Jay gang reads this site.

    • 91B20 1stCav (AUS) says:

      Joseph-would posit that, as a people, we’re dab hands at avoiding/misunderstanding/forgetting harsh lessons from the past while constantly re-spoking the wheel…

      may we all find a better day.

  71. David Hall says:

    My FPL electric bill went up 20% this year. It was the largest rate increase in Florida history. Europe is in worse shape in terms of energy costs. They will be bidding for fuel in the global markets. Germany converted a passenger train to haul coal.

    • ru82 says:

      Europe nat gas prices are the equivalent of $410 barrel of oil. Almost $300 billion in money has been promised by EU government to help consumers and businesses pay for high enery cost.

      So unless the Ukraine conflict ends don’t expect much demand destruction because the solution to high energy prices is to give subsidies to people to pay the higher price. lol

  72. Finster says:

    Another outstanding article, Wolf. I’ve just linked it from my own site. The Fed will buckle at some point, but not without letting a lot of air out of this asset price bubble first. Powell’s “financial conditions” formulation is another way of saying that asset prices lead consumer prices. The lags are many and variable, but it’s not possible to indefinitely inflate asset prices without consumer prices eventually following suit. Either the former must come down or the latter rise to meet them. Or some messy combination of both.

  73. joe2 says:

    Yeah he said it. But was he mis-speaking like before? We shall see.

    Transitory talk is the bedrock of Fed policy.

  74. JJ says:

    No one person should have this much control over the economy, in my opinion.

    • Rusty Blade says:

      There are no free markets when only a few certifiably fallible persons set interest rates arbitrarily for everyone. End the Fed. Congress and the President who swore to protect and uphold the US Constitution are committing treason 24/7 according to Article 1, Section 10 of the Constitution.

      • joe2 says:

        Treason is in the eye of he who controls the guns of the FBI, IRS, DHS, and ATF.

  75. Eastwind says:

    That afternoon, Loretta Mester of the Clevland Fed (a member I’d never heard of before) put some numbers behind Powell’s generic remarks. She said the fed needs to raise rates to 4% and hold them there.

    I look at this as a managed deployment; I think she was told what to say and to go say it. Being a lower profile fed member, if it turns out that the fed does something different not much is lost, not nearly as much of a reputational hit as if Powell gave those same numbers.

    I was very glad to see the fed come out hawking, since I largely sold my portfolio to cash in April. I was happy in June, but annoyed by the market in July and August. I’m hoping they get the message. So I’m not a denier, but a cheerleader at this point.

    However, I do see that Powell is not tying himself to the mast of his inflation-fighting ship, he’s reserving himself wiggle room. And while nobody knows how much effect QT is going to have, 4% rates alone are clearly not enough to move inflation to 2%.

    While there should be little doubt that the wall street dream of the fed moving rates down in 1Q23 is now thoroughly debunked, they’re still not talking about taking rates higher than inflation (nominally) and they’re still talking about doing a go-flat-and-see move.

    This is still either Burns or Volker during his first recession, the one that didn’t work well enough. It’s not the shock and awe Volker, not yet.

    And Powell hasn’t really been tested yet. He talks about pain, but the mob with pitchforks hasn’t yet materialized on his doorstep. As others point out, so far it’s some action and talking a good game, but nothing that would prove he has the true grit needed.

    So we could see rates go to 4%, then stay flat for six months while inflation becomes ever more entrenched and it becomes abundantly clear that 4% isn’t high enough, even though the economy goes into stagflation.

    But september and october are market crash months, and we very well might see the market have a moment of capitulation that would give me the opportunity I’ve been waiting for to buy back in at a much lower price.

    • Wolf Richter says:

      Bullard and Kashkari are higher than that. Bullard wants to be at 3.9% (middle of range 3.75%-4.0%) by year-end and then raise more next year.

      • Eastwind says:

        Yes, Bullard is well established as a hawk, and Kashkari is a nouveau hawk. They aren’t middle-of-the-pack or necessarily the consensus.

        I’m no economist, I can’t say how far is enough, but with inflation over 8% (or it was, I think the latest blip down is just noise) it’s hard for me to believe that QT is going to be worth an additional 4% on top of the 4% (+) rates they’re talking about. I do believe inflation won’t come down unless nominal rates exceed inflation (with some adjustment for QT).

        If they get to 4% expeditiously and then want to slow down to a quarter point per meeting that might be effective enough, but that still seems pretty timid to me.

        A huge difference this time vs Volker’s time is that then the White House was supportive and cooperative with Volker’s efforts. Now Biden is continuing to add to unfunded (deficit) spending with things like the tuition reimbursement, and is starkly resisting actions that would bring down the price of oil. Here’s a quote I dug up from the White House statement after Volker’s suprise 1% rate increase was announced:

        “Recent high rates of inflation, led by surging oil prices, other
        economic data, as well as developments in commodity and foreign
        exchange markets, have reinforced the administration’s conviction that fighting inflation remains the Nation’s number one economic priority.
        The administration will continue to emphasize a policy of
        budgetary restraint. Enactment of effective national energy legislation to reduce dependence on foreign oil is vital to long-term success in this effort.”

        The difference between the Carter White House and Biden’s couldn’t be more stark. Three sentences, opposite alignment on each position. When it comes to fighting inflation, Biden doesn’t get it. By 1979, Carter had been beaten up enough that he got the point that James Carville would state so susinctly much later.

        • nick kelly says:

          He’s an improvement on Trump who engaged in an unprecedented attack on Powell’s baby steps to raise rates. This by the way, was an violation of the Inaugural oath to respect the independence of the Fed.

        • tom15 says:

          DC gets it. This Admin. gets it. These are the ” best of the best”.
          Their walls are papered with degrees. They make trading look easy. Just stand back, take off the blinders, accept it, and invest accordingly. Kinda like coaching hockey youngsters to focus on the core when playing def.

  76. ToeHold says:


    Biden/Powell have created the worst inflation in 40 years.

    Biden/Powell have decimated the the working poor.

  77. graphic says:

    There are three rate rise dates left this year. The Fed can only try to control core inflation, i.e. consumption. We are about to enter the festive season half of the year where new ‘winter’ products and services appear at full price (to be discounted at the end of the season). It would make more sense for the Fed to have a 100bps rise in Sep. to shock and awe consumers into not spending and producers into reducing prices early. The same goes for Nov. 2. The Dec 14 rate rise is too late. They probably won’t, which means more rate rises next year.

  78. SocalJimObjects says:

    I am sure some of these hedge fund gurus would make an appearance next week on CNBC saying things like “Powell only invoked Paul Volcker’s name THREE times, not FOUR, not FIVE, not SIX, therefore he’s going stop raising rates very soon!!!”

    These monkeys can always find a bullish angle in anything and everything. I think that’s like the minimum requirement to becoming a hedge fund “guru”. If their fund is down 100%, they’ll say “well at least we won’t be charging our 2 and 20!!”

    Powell should raise at least 100bps this coming September if he wants to back up his talk.

    • Rusty Blade says:


      Anything less than 6 percent interest rates = loose financial conditions = higher consumer price inflation

      I hope they’ll go there instead of starting WWIII in order to save king dollar (aka unlawful & illegal FRNs according to Article 1, Section 10 of the US Constitution).

    • Socal Rhino says:

      Been hearing that hedge funds have been maintaining bearish positioning for a while now. That’s been cited as the main reason for the recent rally, i.e. squeezing shorts.

      Speculation I’ve seen is that PMs of long portfolios that missed the big drop are using the rips to sell to retail before the bear market resumes down. I find it plausible to think that it’s these institutional sellers that are going on CNBC to talk about the bear market being over.

  79. Franz Beckenbauer says:

    There are people who think the most important thang for “the economy” or “the financial system” is what a wall street private equity lawyer turned fed chair says every other day and what his minions then say to massage it in order to create maximum confusion so in the inevitable end-game they can say “It wasn’t us !”.

    There are a lot of these people. They turn everything into a WWE-style verbal wrestling match. And when on of the guys – “their guy” – does his cpre-choreographed slam-dunk takedown they cheer and do their “I told you so” victory lap.

    And then there are the people who see through the bullshit and place million dollar orders for real money not affected by this crap-shoot and take the stuff off the exchanges at record levels.

    Nothing to see here. Crap on.

  80. FinePrintGuy says:

    It certainly is possible that USG borrowing rates go up so much that it induces a budgetary problem. But that problem hasnt arrived. Honest Fed watchers will admit that the Fed deals with problems *as they arrive*. Not before.

  81. Buiteboer says:

    Evening Wolf,

    Read the article and the discussion thread(s)… very interesting. But, I have one question regarding one line in the article.

    The line: “Reducing inflation is likely to require a sustained period of below-trend growth.”

    The Question: Is this where the ‘recession’ (of course, bearing in mind that there was a brave 1984 attempt by the Bro’s, Hoe’s and His/Her/Him pronoun bearing decision makers in Washington to pre-emptively re-define recession) comes in?

    And, what is your expectations of recession in the US if one holds onto the definition pre Biden redefining it?

    Bottom line, I’m curious about what you think the outlook for a ‘sustained period of below-trend growth’ is? Another two quarters, another year?

    Good luck there in the Northern hemisphere!

    • Wolf Richter says:

      No one is going to redefine “recession.” That’s just bunkum spread for political reasons. A recession is a broad downturn in the economy, including the labor market and other aspects — been that way for decades, and will stay that way because it makes sense. GDP alone is a terrible measure of the economy, and everyone knows it, because it just measures the flow of money: spending for consumption and for investment, without showing where this money came from (borrowed?) and without showing if this spending is doing any good, such as creating jobs.

  82. jm says:

    I just noticed that Schwab has raised margin loan interest rates up to 8.825% for balances of $250k to $500k, ramping up to 10.575% for balances between $0 and $25k.

    IIRC that’s about 3 percentage points higher than a few months ago. Might dampen enthusiasm a bit,

  83. Rico says:

    Volcker raised rates to 20% to kill inflation. It’s not out of the range of possibilities that we can see that by the end of 2023. Get strapped in and don’t look down. Powell usually does what he says he’s going to do.

  84. PonderingPA says:

    The problem in housing is that nobody (among non-economist, ordinary lay people, that is) really knows what a normal or appropriate mortgage rate is. Basically, the two data points we keep hearing about are the recent 2-3% rates of the last couple years and the 15%-18% rates that our parents first paid. So you swing between thinking a 5% is horrible or fantastic, depending on your reference of comparison, and wondering what all this means relative to the prices of then vs. today.

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