We've focused on three scenarios since the start of the decade: a 1920s-style Roaring 2020s, a reprise of the 1990s stock market meltup, and a rerun of That '70s Show with geopolitical shocks causing oil prices and inflation to spike. We haven't had to change our subjective probabilities of 60/20/20 for these three alternative outlooks. However, Fed Chair Jerome Powell is forcing us to change them now, to 50/30/20. In his August 23 Jackson Hole speech, he signaled that he was pivoting from an inflation hawk to an employment dove.
There was no doubt about his remarkable metamorphosis on Wednesday, when he must have convinced his colleagues on the FOMC to lower the federal funds rate (FFR) by 50bps rather than 25bps. As we noted that day: "The FOMC had its first dissent since 2022 at this meeting. Fed Governor Michelle Bowman voted for a smaller 25bps rate cut. But the Fed's dot plot, updated in its new SEP [Summary of Economic Projections], suggests dissent was much greater. Two participants favor not reducing rates again this year, and another seven see just one 25bps cut later this year."
At Jackson Hole, Powell said it all when he said, "We will do everything we can to support a strong labor market as we make further progress toward price stability." Today, stock prices soared to new record highs after Powell & Co. delivered Wednesday's 50bps FFR cut and signaled in the SEP many more to come until the FFR falls to 2.9%, which they currently deem to be the long-run neutral interest rate (chart). At his presser on Wednesday, Powell delivered the stock market to the Promised Land, where "strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%." Investors exuberantly shouted "Halleluiah" today.
