Powell delivered a hawkish speech at the annual meeting of global central banks last week. In just eight minutes, the market evaporated 78 billion US dollars, the Dow Jones fell 1,000 points, the S&P and the Nasdaq fell 3%, and even fell 5.8%. A mourning. However, why has inflation peaked and turned downward, and Powell still hinted that the Fed will still raise interest rates aggressively in September, and will keep interest rates high for a long time?
Judging from the wording, in his speech, Powell specifically mentioned the experience of contraction in the 1980s. Volcker, then the chairman of the Federal Reserve, successfully suppressed inflation in the 1970s in just a few years because of the very strong monetary tightening that accompanied it. policy. According to Volcker’s analysis, the reason why past interest rate hike policies failed is because in the 1970s, most Fed chairs slowed down the tightening policy in advance when inflation peaked quickly, which led to renewed market expectations. , let inflation ignite wave after wave.
Therefore, in order for inflation to decline significantly, market expectations must continue to be weak. As long as the market has any optimistic or loose expectations, it will be difficult for inflation to decline. So what is the reason for Powell to think that inflation is currently resurgent phenomenon?
One of the data is the University of Michigan’s Consumer Confidence Index released last Friday. Because of the decline in short-term consumer inflation expectations, the August data rebounded to 58.2 at a high speed, and the expectation was only 55.4, which was also higher than the 51.5 in July. Much higher, this data shows that the market has not continued to remain pessimistic about consumption, but has turned for the better.
Another piece of data is that the profit margin of companies in the non-financial industry in the United States rose to 15.5% in the second quarter after falling to 14% in the first quarter of this year. The price of products has far exceeded the rate of rising production and labor costs, reaching the level of the 1950s. The current round of interest rate hikes has not completely hit the psychological emotions of companies and the public.
The most obvious should be the unemployment rate. The US non-farm payrolls increased by 528,000 in July, far exceeding market expectations. In addition, the unemployment rate fell to the pre-epidemic level of 3.5%, showing that the job market is very strong. According to past experience, there were three inflation cycles in the 1970s, each higher than the last. The first round of inflation (white line) was only 6%, the second round reached 12%, the third round rushed to 15%, and unemployment The rate (red line) typically climbs within one to two years, entering a recession.
Looking back at the current data, inflation has been on the rise for a year, and the U.S. unemployment rate has continued to decline, reaching full employment. This phenomenon is enough to show that the Fed’s various tightening policies have not had a significant impact. On the other hand, it also means that the Federal Reserve needs to adopt a more tightening policy to control prices.
Therefore, this tightening is actually not a bad thing for the stock market. Observed on a longer-term scale, the tighter the Fed, the more it can suppress the rigidity of prices and let prices return to normal levels earlier, which will help companies to be able to Release the bearishness to test the bottom, and then the mid- to long-term bottom can be fully confirmed.