A Spoonful Of Sugar Helps The Medicine Go Down

In every job that must be done

There is an element of fun

You find the fun and snap!

The job’s a game

(A Spoonful of Sugar, Richard Sherman / Robert Sherman)

Chairman Powell did it again. He has an uncanny ability to make even dour economic pronouncements palatable to investors, a skill that was put to work once again this morning. When those investors are predisposed to see all news as good news, his skill at dispensing economic medicine while maintaining a placid demeanor is embraced by investors. There were mixed messages in Mr. Powell’s speech today, and it is clear that the market is finding the Chair’s prescriptions quite easy to take.

For those readers who woke up late, Mr. Powell gave a 10 AM (Eastern) keynote address to the (now virtual) Jackson Hole conference sponsored by the Kansas City Fed. The key takeaway appears to be that while he may be joining the consensus toward tapering the Federal Reserve’s bond purchases, he sounded less aggressive than his FOMC peers. Most importantly, he does not see the conditions that are necessary for interest rate hikes anytime soon. Markets do not want to think about rate hikes, and both stock and bond investors were encouraged by him seeming to remove the link between tapering and hiking.

Much was made about Mr. Powell’s comments that inflation may indeed by transitory. This is another market-friendly sentiment. If inflation is transitory, it will soon pass. Whether it will pass quietly, like a ship in the night, or painfully, like a kidney stone, is of little consequence to most investors. As long as inflation is perceived to be a passing trend, policymakers have little need to tighten monetary policy to combat it. It will go away on its own. Or will it?  The speech contained these potentially contradictory statements:

“Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2 percent objective over time.”

“We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment.”

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