Jerome Powell, the Fed and their IMPOSSIBLE position

The Fed remains in an extremely challenging position. While Jerome Powell raised the Fed Fund rates by 0.75% today, to 1.5-1.75%, it's still woefully below the underlying inflation of nearly 9%. 

So what is the Fed going to do?  

First, the Fed NEEDS to get inflation under control because "it's very painful for people."

This makes sense: As inflation has outpaced wage growth, real purchasing power has declined!

As consumers can afford less goods and services, sentiment drops and societal unrest increases. This also increases the odds that employees will increasingly need to ask for higher wages, creating an inflationary spiral effect. 

The second reason the Fed is in a very tough spot is because much of the current inflationary outlook is attributable to supply constraints (oil, food) that the Fed has very limited control over. 

This is the set up for STAGFLATION. 

The Fed raises rates to temper demand, which hurts the economy, but underlying prices for some goods remain high because of supply shortages. So what does the Fed do? If inflation remains high, the Fed has to keep pressing the monetary brake pedal until there's enough demand destruction that inflation cracks.

When that finally happens there's a RECESSION. 

This is a very tough spot for the Fed. Powell's decisions will have huge repercussions for U.S. stocks, housing and the economy in the quarters ahead. I look forward to discussing this further in this week's exclusive UNRIVALED INVESTING letter.  


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