Jerome Powell Holds America’s Future in His Hands

Federal Reserve Chairman Jerome Powell

A pair of record highs and a strong showing from the tech sector.

In other words, it’s another ordinary trading day in the coronavirus-rally.

The S&P (+0.60%) and Nasdaq Composite (+0.80%) shot higher this morning while the Dow (-0.05%) posted a minuscule loss. Sentiment was lifted further by strong U.S. economic data and more good news surrounding Covid-19 vaccines.

U.S. durable-goods orders – orders for goods that yield utility over time – grew by 11.2% in July, blowing away the 4.3% economist estimate.

Leuthold Group chief investment strategist Jim Paulsen sees it as yet another bullish influence. He says the current rally has been supported “by converts finally joining the party, by recent persistent declines in Covid cases, the halo of ongoing new treatments, and renewed progress on trade negotiations with China.”

Now, Paulsen can add an increase of durable-goods orders to that list.

That hasn’t stopped Kansas City Federal Reserve President Esther George, however, from voicing her concerns over a “double-dip” recession. In an interview with CNBC, George commented on the potential effects of an uptick in Covid-19 cases.

“An important risk to that outlook is thinking about what happens as we come into the fall, whether we see any resurgence in the virus that would cause an additional pullback in the economy,” she said.

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“We’ll monitor that carefully to see whether that plays out.”

George continued, adding that she believes “we will continue to see the economy improve,” and that she doesn’t recommend any further action from the Fed.

“Financial conditions are very accommodative. We have low rates, we still have capacity in those credit facilities,” George explained.

“So, I think it’s too soon to try to speculate on whatever else might be needed, other than to say the Federal Reserve is going to be very vigilant on that and be prepared to respond if they would have to.”

As part of the Fed’s annual symposium on monetary policy – held from Thursday to Friday of this week – Chairman Jerome Powell is expected to deliver a landmark address on inflation. His prior remarks indicated that the central bank would target a higher inflation rate moving forward.

Selling Americans on the idea won’t be easy, though. Typically, higher inflation is accompanied by higher costs of living as goods and services become pricier. For those living on fixed incomes, like pensioners and other retirees, inflation can be very damaging.

Especially during an economic recovery.

On the other hand, a period of deflation – what Powell’s trying to avoid – would arguably cause even more damage in the long run.

“The situation is really perilous right now and there is little that monetary policymakers at this point have left in their arsenal,” said David Wilcox, former head of the Fed’s research division.

It’s a “damned if you do, damned if you don’t,” scenario for the Fed. What the central bank really needs is a revival in U.S. business activity to solve its problems. Thankfully, the economy is certainly making a comeback, but it might not be fast enough as Covid-19 lingers.

America’s average standard of living will absolutely drop in response to higher inflation, possibly to an all-time low. If that happens, and another crisis hits (or economic growth slows), the Fed won’t be able to steer the U.S. away from a dire fight with deflation.

All while the market continues to set record highs week after week, until eventually bulls “sober up” amid a grim correction.

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