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Aug. 2022 – Powell Has Spoken

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. – Friedrich Hayek

On August 26, following a speech by Fed Chairman Powell, the S&P 500 plummeted by 3.4 percent. “We must keep at it” declared Mr. Powell, signaling that the Federal Reserve Open Market Committee (FOMC) will continue to maintain high interest rates until inflation is under control.

The Fed is burdened with a dual mandate to pursue both a stable price level and maximum employment. The stock market’s reaction confirmed its status as a leading indicator of economic activity, as Mr. Powell’s words clearly convinced capital markets that, at least for now, price stability is the Fed’s primary objective, even if that means further economic contraction and lower employment.

The Fed has substantial discretion to pursue its mandate. In effect, monetary policy relies on the judgment of central bankers who comprise the FOMC. Results have been mixed, at best. Most recently, in late 2020 the Fed announced it would target an average annual inflation rate of 2 percent, yet two years later consumer inflation stands above 8 percent. Whether this is attributable to shocks, imprudent monetary expansion, or some combination, it’s clear the Fed has failed.

Since future inflation and growth depend so heavily on the judgment of central bankers, markets reflect current expectations regarding FOMC member opinions. Market volatility therefore often spikes following unexpected communications from the Fed. The financial media revel in this arrangement. The FOMC meets eight times a year, which provides reliable fodder for journalists and pundits eager to speculate regarding “what will the Fed do next.” This serves only to fuel further speculation and volatility.

Also In This Issue

The Fed Needs A Single Mandate
What To Do With A Concentrated Stock Position
Roth IRAs For Kids: Put Summer Earnings To Work
Your Rights As A Taxpayer
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles