Golden Ten Data, August 3, more than half a year ago, when the stock market was still trading near all-time highs, Zoltan Pozar, a former Federal Reserve and U.S. Treasury Department official and now a strategist at Credit Suisse (Credit Suisse) Zoltan Pozsar has a suggestion to the Fed: detonate the stock market to curb inflation.
Pozar said at the time:
“I believe growth will not be stifled when less risky assets pull back. In order to contain inflation and ease tensions in the U.S. labor market, the Fed may try to use volatility to hit home prices and risk assets, including stocks, credit and Bitcoin. In short, destroy speculation.”
Fast forward to today, and the Fed’s actions are again in line with Pozar’s analysis. U.S. stocks have entered a bear market, the cryptocurrency market has ushered in a cold winter, commodities have risen sharply ( except for natural gas and oil), and the U.S. economy has fallen into a “technical recession.” But unfortunately, inflation remains on an upward trend.
Of course, with U.S. oil and gasoline prices slumping in anticipation of a U.S. recession, and most other commodity prices at or below pre-Russian-Ukrainian levels, inflation is unlikely to remain as sticky as it is now, especially given the U.S. July The PMI (Purchasing Managers’ Index) fell to 60 from 78.50 in June 2022, well below expectations of 75 and hitting a new low since August 2020.
Mike Feroli, chief economist at JPMorgan Chase, expressed the view:
“Between now and the September FOMC (Federal Open Market Committee) meeting, U.S. CPI will continue to decline due to energy prices/base effects, and employment data may also soften (as evidenced by the recent higher initial jobless claims). We therefore expect the Fed to raise rates by 50 basis points in September and a more dovish stance for the rest of the year. The Jackson Hole annual meeting of central banks on August 25-27 this year may provide further evidence for the Fed’s dovish turn. Lots of support.”
Financial blog Zero Hedge also echoed JPMorgan’s view that the Fed will use this month’s Jackson Hole meeting to signal an impending dovish reversal. But Pozar disagreed, noting that a “dovish reversal” may not happen when inflation remains entrenched, Friday’s non-farm payrolls are still hot, and CPI data is higher than expected again.
Right now, with inflation already ingrained in the U.S. economy, according to Pozar, the U.S. economy may need to experience a deeper and more protracted recession than the market and himself had anticipated, to contain the staggering price gains.
Markets are also increasingly convinced of a dovish turn from the Fed as more and more people expect the CPI peak to be a thing of the past. But according to Pozar, the risk of continued global cost pressures remains high, likely because inflation stems not only from central bank overstimulation of the economy during easing cycles, but also from geopolitical crises, supply chain shifts and other structural factors. Nor can they be ignored, and these causes are not easily eliminated.
In the latest report, Pozar said he had visited more than 150 clients in eight European capitals over a six-week period, and the visits left him with the impression that the expected path of interest rate policy by Western central banks depends on two expectations : First, inflation is about to peak; second, hawkish policies are about to peak.
Obviously, if the first expectation is true, then the second expectation is also true. But the first expected risk is that it is premised on a stable world without geopolitical risk premiums, where demand management is more of a priority than supply-related issues. But the truth is that we live in an unstable world, where geopolitical risk premiums are rising, and the supply side and its attendant issues are more of a headache than demand management. So if the first expectation is wrong (inflation is driven by economic warfare rather than central bank overstimulation), then the second is wrong (the central bank has not yet reached the peak of its hawkishness).
Pozar also laid out his views on how inflation has faded over the past 40 years, drawing heavily on history and geopolitics, and referenced past “great macro investors” such as George Soros, Stanley Druckenmiller, Paul Tudor Jones and Lewis Bacon, among others. Pozar believes that these investors are trading in a peaceful world interspersed with relatively minor military conflicts. Today’s military conflict, however, is a complex economic war between global powers, driving up price levels and creating stubbornly high inflation.
Pozar said that today, inflation is almost everywhere, and it has become the topic of most concern among the public, investors and the media. If you are a fresh graduate of college economics, when he is in a world where the prices of all commodities fluctuate randomly, epidemics recur, and the geopolitical situation is stalemate, he will not be able to predict future inflation. In that case, why is the market so confident that inflation is about to peak? Is it just because the Fed said so?
This time around, Pozal’s views aren’t unique, or even insightful, according to financial blog Zero Hedge: Pozal simply said he thinks the Fed will remain hawkish for much longer than the market expects. However, that is exactly the argument made by several Fed officials a few days ago.
Zero Hedge argues that these officials are motivated by pushing up bond yields, driving down the stock market and aggressively tightening financial conditions. After all, if the market currently thinks the Fed will turn dovish in the future, that means all the Fed’s efforts so far will be in vain. Pozar made such a point only because he was on the Fed’s side.
Of course, that doesn’t mean Pozal is wrong, though it’s possible. Zero Hedge points out that if some of the latest economic data is catastrophic, the political resistance to the Fed raising interest rates will grow, and Biden aides will soon realize that a recession triggered by mass layoffs is more likely than not. Soaring inflation is even worse.
Zero Hedge added that Pozal also ignored the most basic lesson of capital markets, that inflation is always a political rather than a market consideration ; not only that, but Pozal also sought to downplay the current relationship with the U.S. in the 1970s and early 1980s. any similarities between recessions.
Unlike at the time, Pozar pointed out in the report that two consecutive rate hikes by the Fed by 75 basis points were not enough to eliminate inflation. Discussing why the U.S. labor market will remain depressed for a long time (i.e., labor shortages and continued wage-price spirals), Pozar writes:
“Today, the U.S. economy faces a bigger problem: labor shortages, especially in the service sector. This is due to a combination of factors, such as tougher immigration policies to appease nativists; pandemic-driven early retirement and other labor market changes; and extreme wealth growth (such as staggering cryptocurrency investment yields) eroding labor force participation (the “squatter”) on the one hand, and driving aggregate demand for services on the other.
This sucks: Raising labor force participation in the U.S. economy is much harder than dealing with the politics of wage setting. Even in The Matrix, this problem can only be resolved by time. At present, despite the dilemma of labor shortages in the U.S. economy, U.S. President Biden’s chief labor lawyer is still encouraging workers, including those in the service industry, to join unions. “
So how can we solve this problem? Pozar wrote:
“Right now, the priority is not to catch up with the level of aggregate income before the 2008 global financial crisis, but to catch up with the level of aggregate supply before post-nativism, post-pandemic and post-Russian-Ukrainian conflict. I think the level of economic activity needs to be in ‘L ‘type recession. Otherwise, the U.S. economy will face more and more inflation problems.”
Pozar points out that the “L” shape has two parts: first, an “I”, which you can think of as a vertical drop (probably a deep recession); second, an “_”, which you can think of as a flat line (stagnation, such as stagflation).
Regarding the first part, the vertical decline means that the Fed’s “soft landing” commitment has fallen through.
Regarding the second part, there is no guarantee that the Fed will cut rates after a vertical decline: when stagflation hits, it means that interest rates may stay high for a while to ensure that the rate cut does not lead to an economic rebound, which may trigger a new round of inflation swell. Pozar said he has so far not heard the Fed signal at any FOMC meeting that it wants to avoid a recession, or that the Fed will cut rates if it hits.
Pozar wrote:
“If you still think inflation has peaked, the Fed funds rate peaked at 3.5%. And the Fed is going to cut rates next year because a recession is looming and stocks are now on the verge of a bear market (maybe not, because the U.S. economy needs a recession, lower asset prices) means heading for a recession), then you’re dead wrong. On the other hand, it’s dead wrong to listen to the Fed’s consistent miscalculation.”
Powell believes that Powell will do everything in his power to keep inflation in check, even at the cost of a “depression” and a lack of re-election. Between a severe recession and damage to the Fed’s reputation, a severe recession is the lesser of two evils. The former is the Fed chairman’s clear conscience, while the latter is a lifetime burden.