The only thing worse than a hostile monetary policy is a Federal Reserve that does not know what it is doing. The markets are dealing with both.
As inflation hit a 40-year high in January 2022, Federal Reserve Chairman Jerome Powell said the Fed “decided to keep the target range for federal funds rate at 0 to ¼ percent.” In that same press conference Mr. Powell referred to inflation as a “high class” problem. Now, after high inflation has caused a rout in the currency, commodity, stock, and bond markets, Mr. Powell has found religion and wants everyone to know that low, stable inflation is the “bedrock” of the economy.
For well over a year, Chairman Powell has repeatedly said that the Fed is “guided by our mandate,” one of which is stable prices. As the Fed ignored inflation and did not begin to raise interest rates until the Consumer Price Index (CPI) was 7.5 percent – a 40-year high – markets are sending a message to the Powell-Fed that those type of statements are not credible.
Consequently, markets have lost confidence in the Fed and are acting accordingly.
September saw the S&P 500 index fell 9.3 percent, the yield on the 10-year U.S. Treasury Note rose 68 basis points (0.68%) to 3.83 percent (it was 2.60 percent on August 1, 2022), and a barrel of oil fell from just over $88 to roughly $79.70.