Is ”Pain” a Codeword for Recession?

Last Friday Fed Chairman Powell gave an incredibly important speech in Jackson Hole to dozens of economic and financial experts. Powell said inflation remains stubbornly high and cooling it will require forceful action that could soon bring “pain” to households and businesses nationwide and that this “pain are the unfortunate costs of reducing inflation.” I believe the word “pain” is just another word for recession.

Further Powell said the Fed is not in a place to “stop or pause” rate increases. The Fed believes that “restoring price stability will likely require maintaining a restrictive policy stance for some time.” What does restrictive mean? Most people believe the Fed Funds Rate will need to be at least 3.50% to 3.75% for a lengthy time period. Currently the Fed Funds Rate is 2.50% and there is a strong chance for another ¾% rate increase on September 20th. And expect more rate increases at their November & December meetings. Don’t be surprised if the Fed Funds Rate is 4% by end of the year which means the Prime Rate will be 7% and this is the rate that car loans, home equity loans, credit cards, and many business loans are based off of.

After his speech the stock markets dropped over 3% and surprisingly mortgage bond prices dropped by over 20 basis points and the 10 Year Treasury Bill yield increased by 1 bp. Normally when we see big stock sell-offs bonds rally, but that didn’t happen last Friday. This surprised me as I thought Powell’s strong message about fighting long-term inflation would cause the bond markets to rally, but that didn’t happen on Friday or on Monday.