{"id":144476,"date":"2022-08-31T10:50:40","date_gmt":"2022-08-31T16:50:40","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144476"},"modified":"2023-08-08T14:56:11","modified_gmt":"2023-08-08T20:56:11","slug":"powell-reducing-inflation-will-bring-some-painwhat-does-this-mean","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/powell-reducing-inflation-will-bring-some-painwhat-does-this-mean","title":{"rendered":"Here&#8217;s What Jerome Powell Said Last Week and Why You Need to Prepare for What&#8217;s Next"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC8982043524&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">A few people have asked for my opinion on the speech Jerome Powell gave last week about the direction of Fed policy. So, here&#8217;s my take.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Powell\u2019s Speech Points to Oncoming Economic Pain&nbsp;<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">First, unlike other speeches he&#8217;s given over the past few months, this one was a little <a href=\"https:\/\/www.biggerpockets.com\/blog\/inflation-what-the-fed-wont-tell-you\" target=\"_blank\" rel=\"noreferrer noopener\">less nuanced<\/a> and a little more direct, addressing the problems we&#8217;re facing head-on, along with the solutions that the Fed is going to pursue. Not surprisingly, much of the short speech focused on getting <a href=\"https:\/\/www.biggerpockets.com\/blog\/why-is-inflation-so-high\" target=\"_blank\" rel=\"noreferrer noopener\">inflation under control<\/a> or what Powell referred to as &#8220;restoring price stability.&#8221;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In his comments, Powell was pretty direct in his belief that the efforts the Fed is prepared to undertake to control inflation will cause economic pain. In other words, we&#8217;re past the expectation that a &#8220;soft landing&#8221; is still possible.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Below are some of his specific comments, along with my interpretation. A link to the full speech is&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.federalreserve.gov\/newsevents\/speech\/powell20220826a.htm\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">here<\/span><\/a><span data-preserver-spaces=\"true\">:<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">Powell:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;The Federal Open Market Committee&#8217;s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">My Thoughts:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">There have been many discussions recently about whether the Fed would be happy with inflation back down to 3-4% instead of the historical target of 2%. Powell seems to be very clear here that 2% is the goal, which likely means a more aggressive stance.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In fact, later in the speech, he specifically addresses this and says that now is not the time to step off the gas when we get close to 2%. There are too many risks if we don&#8217;t stay aggressive.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">Powell:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">My Thoughts:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">This is the most direct admission we&#8217;ve gotten from the Fed that tackling inflation may not come quickly, will require some aggressive policy, and will likely lead us into higher unemployment and a clear recession, as well as potentially longer-term reduced GDP.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">Powell:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;While the lower inflation readings for July are welcome, a single month&#8217;s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down&#8230;Committee participants&#8217; most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4% through the end of 2023.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">My Thoughts:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">This should reinforce expectations for another .75% rate hike in September unless we get a surprisingly good <a href=\"https:\/\/www.biggerpockets.com\/blog\/cpi-report-june-2022\" target=\"_blank\" rel=\"noreferrer noopener\">CPI<\/a> number for the August time period. Even then, we&#8217;ll likely see at least a .50% hike. And it appears he&#8217;s preparing everyone for rates to potentially hit 4% before all of this is done.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">Powell:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply and that the Fed&#8217;s tools work principally on aggregate demand\u2026There is clearly a job to do in moderating demand to better align with supply.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><span data-preserver-spaces=\"true\">My Thoughts:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">This little comment hasn&#8217;t been discussed much from what I&#8217;ve seen, but it deserves mention. Basically, Powell is saying that inflation is clearly being caused by both demand and supply issues (most agree) and that the Fed only has the ability to impact demand, not supply. This seems to me to be an admission that the Fed is concerned that they don&#8217;t have as much control over inflation in this situation as they&#8217;d like and are prepared to be extra aggressive if necessary.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Long story short, expect at least a couple more rate hikes this year, the core interest rate (the Federal Funds Rate) to potentially hit 4%, and don&#8217;t be surprised if we experience some significant economic pain for the foreseeable future.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Additionally, while it wasn&#8217;t explicitly addressed in the speech, I suspect we will see some additional tightening of the Fed balance sheet. While we&#8217;re currently seeing the Fed roll off mortgage-backed securities and bonds\u2014meaning that they let these expire without buying more\u2014I would be surprised if we start to see more aggressive selling of Fed assets over the next 6-12 months.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_64dd5ab97ed79\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-slate-900-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-large-font-size wp-block-paragraph\"><strong>Analyze Deals Like a Pro<\/strong><\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Deal analysis is one of the first and most critical steps of real estate investing. 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Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/powell-reducing-inflation-will-bring-some-painwhat-does-this-mean&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>A few people have asked for my opinion on the speech Jerome Powell gave last week about the direction of Fed policy. So, here&#8217;s my take. Powell\u2019s Speech Points to [&hellip;]<\/p>\n","protected":false},"author":2444,"featured_media":144478,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433,7119],"tags":[],"class_list":["post-144476","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144476","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/2444"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144476"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144476\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144478"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144476"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144476"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144476"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}