Powell’s Warning: No Rush for Rate Cuts—Should Investors Be Worried

Stocks traded lower yesterday as Jerome Powell reminded traders that he has nothing to do with the prevailing, effervescent Trump trade. Producer prices ticked up last month leaving everyone wondering if it is a sign of a future pickup in consumer inflation.

Not fade away. I really wanted to write something fun this Friday morning. You, my regulars, deserve it after yet another week of intense action in the markets and the economy. A Beaver Moon will rise tonight! When I walked carefully down the stairs to make my espresso this morning, I could see through my half-open eyes what looked like almost daybreak. Did I sleep late? I looked down at my watch, eyes now fully opened, I noticed an almost full moon (Apple watch ) and that, thankfully, it was 4:03 AM. Tonight's Beaver Moon is nothing really special other than that it had been named that to signify when Beaver begin to hunker down for the winter. It is, in fact, the last full moon before the Winter Solstice. That is all I have time for today. Unfortunately, I have to talk to you about the Fed and interest rate. Are you excited?

Yesterday, markets were somewhat holding their own given a long week of Trump appointees, several key earnings announcements, lots of Fed chitchat, and at least two very important economic releases. That was until the most powerful man in Washington DC -- sorry Former Future President Trump, it's not you - JEROME POWELL, Fed Chair and guy with his own big red button, dropped some info on the bulls. It came in the form of a simple sentence: "The economy is not sending any signals that we need to be in a hurry to lower rates." Wait, what? Not in a hurry, as in, we may not keep cutting rates at the recent pace? Why would Powell say something like that? First, it is important to note that the Chair is a very calculated speaker. He does not just say things to sound smart or important, no. He sends guidance to the markets in order to allow the market to do his dirty work, and to maybe, save you from stress when at some point in the future when the Fed does not cut, you are not blindsided. Let's have a closer look.

We got a topline Consumer Price Index / CPI figure earlier in the week that, indeed, showed a slight increase over September's, though the monthly change was flat. Nothing scary there as all the numbers came in right where economists were expecting them to. Yesterday's Producer Price Index / PPI came in a bit (only a bit) higher than the prior month's print and also got an upward revision. Just so you know, PPI and Core PPI have been trending slightly higher. Remember that PPI represents prices received by producers for their goods and services. It is like wholesale prices. PPI is considered to be a leading indicator of CPI because, remember, rational firms pass on rising costs to consumers. Noted. The 4-week moving average of weekly, Initial Jobless Claims is trending downward, meaning, the labor market is not imploding. Noted. The Unemployment Rate, which hit 4.3% in July, seems to have stabilized at a lower 4.1%, printing twice in a row. Noted. Equity markets, though the Fed is not concerned with them (directly), have been holding up, despite recent bumpiness. Noted. So, why rush? Keep some dry powder for when "stuff" really hits the fan, and, as aforementioned, inflation is still above target.

All this seems prudent despite the upset Powell's comments caused the markets yesterday and overnight. Is it really prudent, though? Let's have a closer look at CPI. As you are probably not surprised, the bulk of the current level of inflation still comes from Core Services inflation. Core Goods Inflation is actually negative, which means deflation, as in prices are less than they were a year ago. Digging into Services, we note that Shelter inflation is still the dominant force. That means, in a roundabout way, housing prices, and actual rent. When fighting fires, it seems like a good strategy is to eliminate, or extinguish the source, wouldn't you say? Now, here is a concept that I have brought to you several times in the past and I have been quoted many times in the press about. Hiking interest rates does not eliminate housing inflation, but in fact, serves to make it worse. High interest rates are only really effective against consumer-driven goods inflation! Don't believe me? Have a look at this chart, then follow me to the finish.

On this chart, one can see clearly how Core Goods Inflation began its steep descent to DEFLATION right after the Fed started hiking rates in March of 2022. Core Service Inflation actually picked up, peaking a year after the hikes started. While it has since eased, it is currently just about where it was WHEN THE FED STARTED HIKING rates. Higher interest rates are affecting housing supply, keeping it scarce and pushing prices higher. While builders are certainly building, they are not building enough. For the record, builders build more when interest rates are - wait for it - lower. Additionally, why would a REIT, which relies heavily on borrowing, lower rents while rates are too high to refinance, and its floating rate debt, tied to SOFR rates (which are tied to Fed Funds Rate), remains high or in danger of increasing? They wouldn't! Go ahead and look at my chart again.

In the wake of Powell's chatter yesterday, expectations for a December cut declined somewhat, though Fed Funds Futures still gives the cut a 66% chance, which is respectable odds for Wall Street. Looking out to the end of 2025, markets are expecting Fed Funds to be lower by another 75 basis points, assuming we get a cut next month. Not a great sign for renters, if you are following my logic. Additionally, 10-year Note Yields, which impact mortgage rates are around where they were at the beginning of the summer. The Fed has no control over those, but the fact that they too appear to be in "no hurry" to go lower is not a good sign for home buyers and sellers. Tonight's Beaver Moon will rise over Wall Street at 4:32 PM, just minutes after sunset. I will be watching.

YESTERDAY'S MARKETS

NEXT UP

• Retail Sales (October) may have climbed by 0.3% after rising by 0.7% in the prior month.
• Industrial Production (October) probably slipped by -0.4% after declining by -0.3% in September.
• Fed speakers today: Goolsbee, Collins, Williams, and Barker.
• Next week: still more earnings, lots of housing numbers, Leading Economic Index, regional Fed reports, flash PMIs from S&P Global, and University of Michigan Sentiment. Check back in on Monday morning for your weekly calendars.

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