Inflation and The Pinocchio Press

Winston Churchill once said: “A lie gets halfway around the world before the truth has a chance to get its pants on.”

No one could accuse Federal Reserve Chair Jerome Powell of being Churchillian. Powell and his team have made mistakes, i.e. keeping rates too low for too long and then overcompensating by excessive tightening. However, during his press conference Wednesday, Powell did an admirable job of debunking prevalent lies about inflation.

As a veteran journalist, I’ve trained my mind to seize on revealing moments that the rest of the media herd often fail to fully appreciate. One such moment occurred at Powell’s presser Wednesday, following the 0.25% rate hike announcement by the Federal Open Market Committee (FOMC).

During Powell’s question-and-answer scrum with the press, Fox Business reporter Edward Lawrence suggested that the latest federal budget was largely responsible for inflationary pressures. Lawrence asked: “Inflation has been rather sticky, so do you need help from the fiscal side to get inflation down faster?”

Powell replied: “We don’t give advice to the fiscal authorities, and we assume that we take fiscal policy as it comes to our front door, stick it in our model along with a million other things, and we have responsibility for price stability. And we will get inflation down to 2 percent in time.”

Lawrence followed up with an opinion disguised as a question: “But the spending that’s happened is working against what you are doing, right? So it’s prolonging inflation?”

Powell firmly pushed back: “You have to look at the impulse from spending, because spending was, of course, tremendously high during the pandemic, and then as the pandemic programs rolled off, spending actually came down. So the sort of fiscal impulse is actually not what’s driving inflation right now. It was at the beginning, perhaps, part of what was driving inflation, but that’s not really the story now.”

At the same press conference, Powell suggested that the Fed would soon end its tightening campaign. This expectation of a Fed pause should serve as a tailwind for equities.

On Thursday in volatile trading, the main U.S. stock benchmarks closed mostly higher, as follows:

  • DJIA: +0.23%
  • S&P 500: + 0.30%
  • NASDAQ: +1.01%
  • Russell 2000: -0.41%

Technology stocks outperformed, as Treasury yields declined and investors reduced their Fed rate hike projections.

Facts matter…

Powell certainly isn’t a liberal partisan. He’s a registered Republican and a Trump appointee who was renominated by President Biden. A lawyer and former investment banker, Powell has an estimated net worth of $55 million.

In fact, the progressive wing of the Democratic party loathes Powell. His prolonged hawkishness has come under particularly fierce attack by U.S. Senator Elizabeth Warren (D-MA), who said this week that Powell has “failed” at his job.

Powell also has a disconcerting propensity for talking down the markets, by emphasizing the bear case in off-the-cuff remarks. However, in this era of disinformation and fake news, it’s reassuring to know that the man in charge of U.S. monetary policy is living in the truth-based world.

Riddle me this: If inflation in the U.S. was being caused by runaway fiscal spending, why is inflation even worse in many countries around the world?

Geopolitical strife, notably in Ukraine, has generated high energy costs. At the same time, supply-side disruptions from the pandemic have distorted consumer prices. The upshot: nearly half of countries worldwide are struggling with double-digit inflation rates or higher (see chart).

The good news is, inflation in the U.S. and many other countries is cooling. Shipping costs are plunging; supply chain disruptions are easing; crude oil prices are falling; and Fed tightening is starting to show up in various economic indicators, such as consumer spending.

The betting on Wall Street is for headline consumer price index (CPI) inflation to decline to under 4.0% by the end of 2023, which would take pressure off the Fed.

We’re nearing the end of rate hikes, and when the Fed hits pause, the economy and stock market will embark on a sustainable rebound. In the meantime, I recommend that you continue to use market volatility to rebalance, diversify and add quality investments at bargain prices.

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John Persinos is the editorial director of Investing Daily.

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