Stocks rallied Friday as investors welcomed comments from Federal Reserve Chairman Jerome Powell in Jackson Hole that pointed to stronger than expected economic growth. Investors cheered Powell’s confidence in continued U.S. economic growth, as he cited “especially robust” consumer spending and early signs of recovery in the housing market, while reiterating the Fed’s commitment to pull inflation back to its 2% goal. The Fed chief’s remarks were eventually seen as being free of surprises, with Powell reaffirming a data dependent approach and saying that policymakers at upcoming meetings would “proceed carefully” while assessing incoming economic data.

The bad news is that Jerome Powell made no bones about the unwavering pursuit of his ultimate objective: 2%. With US inflation much cooler than its pandemic highs, investors would like to have heard that the Fed may be close to declaring victory—even if rates must remain higher for longer just to make sure. In the meantime, the 10-year yield continued to rise, hitting a fresh 52-week high this week over 4.3%. The 30-year fixed-rate mortgage reached 7.48% this week and is now threatening to rise above 8%.

The big unknown holding back a sustained bull market rally is whether we are out of the woods or whether a slowdown is coming later this Fall.

Future Wealth’s View

The fact is, just as zero interest rates are not sustainable, neither are high interest rates, without causing damage to the economy. But, there is a problem that could come to bite the Fed when the fight with inflation is over. They can’t simply cut interest rates as investors would like them to. The US government is running unprecedented levels of budget deficits, and fewer and fewer investors are willing to buy government debt. Fitch recently downgraded the US’s credit rating due to an “erosion of governance” and a lack of will to raise taxes. The Treasury needs to sell trillions of dollars in bonds to cover its budget deficits, and the market has not been keenly interested in buying them. As long as government deficits go unchecked, interest rates will continue to rise.

In many ways, the August stock market ~5% correction was precipitated by the same reasons stated above – concerns about higher interest rates, a downgrade of U.S. bonds, and an uptick in inflation. We, at Future Wealth LLC, remain cautiously optimistic and expect the stock market to digest the Q2 earnings and Fed’s statements through September culminating in the Fed meeting later next month.