Plan for More Wealth Destruction

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Tight monetary policy and rising government debt will drive a regime of high interest rates, depressing stock prices and destroying the wealth of clients, most severely those at or near retirement.

“Inflation and the Labor Market” was the title of Fed Chair Jerome Powell’s speech given at the Brookings Institution on November 30 of last year. Powell shared the Fed’s thinking on inflation, specifically what is propelling it, and how the Fed intends to push inflation back to its 2% annual target.

Powell delivered a hawkish message. He spoke about headline and core PCE, the two inflation measures to which the Fed pays the closest attention. Powell said core PCE inflation continues at a high level, having hovered around 5% throughout 2022, and he acknowledged the Fed’s failure to bring it under control.

Powell shared a chart that indicated three areas of inflation that are of particular concern: core goods, housing services and core services (less housing). While highlighting the fact that core goods inflation has fallen considerably since its 2022 peak, the opposite was happening in housing services inflation, a trend he projected would not change until the second half of 2023 at the earliest.

Powell also spoke about core services inflation, which he explained accounts for approximately one-half of the core PCE price index. He indicated that the labor market will drive what happens next, while observing that the current extremely strong labor market – 263,000 jobs were created in November – is misaligned with the Fed’s 2% inflation target.

Powell stated that average hourly earnings increased by 5.1% in November compared to the same period in 2021. He explained that the Fed’s 2% inflation target can’t be achieved until wage growth is slowed by around 2% from its current rate of increase. For context, average hourly earnings (HRE) between 2006 and 2019 had an average monthly increase of 0.2%. Toward the end of 2022, HRE increased threefold that average, to 0.6%.

The labor market shows no signs of slowing. According to the St. Louis Fed, there are 1.7 job openings for every person seeking employment. There is no indication that large numbers of workers are going to lose their jobs in the foreseeable future. This also highlights the Fed’s inability to dampen demand.

Macro economist Richard Duncan reminded us that inflation occurs when demand exceeds supply. The Fed, however, has no control over supply. It can only reduce demand by fighting inflation. To reduce demand, the Fed raises interest rates, and destroys money through the process of quantitative tightening (QT). This is done with the unspoken goal of throwing Americans out of work to drive down asset prices and destroy wealth. Fewer jobs and less wealth leads to depressed demand.

Despite all of its recent monetary tightening and rate hiking, to date the Fed has not succeeded in slowing wage growth or in reducing the number of jobs.