A Christmas Powell

| December 15, 2023

Is there now a Powell Put? Many clients will remember the famous Greenspan Put of the 1990s. Investors became so enamored of then Fed Chairman Alan Greenspan’s talents at managing the economy that they felt comfortable buying stocks at any price. After all, the godlike Mr. Greenspan would come to the rescue with rate cuts and easy money. This became known as the Greenspan Put. Just as owning a put (a variety of stock option) is a type of insurance against price declines, investors saw the Federal Reserve as a limitless insurance policy against losses.

The projections released Wednesday by the Fed are being received as Chairman Powell’s reincarnation of the Fed Put. They now expect the target federal-funds rate to decline to between 4.5% and 4.75% by the end of 2024. A 0.75% rate cut would be highly stimulative to the economy, which explains the enormity of what is becoming known as the “everything rally.” Lower rates would also change the math when calculating the value of stocks and bonds.

Chaiman Powell is trying to avoid the ghost of Arthur Burns. I do not know if the departed Fed Chairman is the ghost of Christmas past or present, but he is the specter that Powell does not want haunting his future. The talented and highly educated Chairman Burns had the misfortune of presiding over the Fed during the end of the Vietnam War, the jettisoning of the gold standard, Watergate, and the OPEC oil embargo. He cut rates with the hope of avoiding recessions only to see inflation repeatedly return with a vengeance. I graduated high school in 1973 and almost immediately learned the new word "stagflation". My youth saw rolling bouts of inflation, recession, and double-digit unemployment that lasted for ten years.

I pray that Powell’s novella ends as he would like, and that the economy walks again like Tiny Tim and all of us eat the fattened goose joined by a reformed and jolly Ebenezer Scrooge. The nation and the world should pray for that too. However, I am left where I always am, which is hoping for the best while preparing for the worst.