JPow Speaks — When JPow speaks, Wall Street listens. And yesterday, Powell once again blessed traders and investors with his appearance but cursed their long positions with the things he said. Let’s take a look.

Like everybody already 100% knew before, rate hikes are coming soon. The reconfirmation of this confirmed fact seemed to inject more certainty into traders' minds. Keep in mind that it is not only rate movements themselves that heavily impact markets but also expectations of movements down the line and degrees of certainty around those expectations. We know they’re coming, but as far as timing goes, all JPow could say was “soon.” Recall, previous expectations were for hikes in March once the tapering process is complete. Now I guess the question is, “what counts as soon?”

The point is, we can’t stay at zero forever. Powell indicated that “the economy no longer needs sustained high levels of monetary policy support,” and with that, “inflation risks are still to the upside in the views of most FOMC participants, and certainly in my view as well.” That’s Latin for “yeah, we’re gonna tighten this sh*t real good.” Previously, when JPow and the Fed introduced the word “transitory” into common parlance, it was thought supply chains were the primary drivers of higher costs. Safe to say that no longer is the view of the Fed, but Powell did remark, “we will eventually get relief on the supply side.” Still, it’s important that the Fed “be in a position with our monetary policy to address all of the plausible outcomes.”

One noticeable change in this meeting, however, was the focus on the Fed’s balance sheet. See, you can only lower rates so much. Once they’re at zero, the only way the Fed can impact market rates is through their balance sheet. By holding nearly $9tn on the books, the Central Bank is artificially pulling bond rates down and prices higher on account of the demand they inject into the system. In order to return to “normal” credit markets, reducing the balance sheet is crucial. Powell said, “There’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable.” Not to worry, though. Rate hikes come first. So we don’t have to worry about this too much… yet.

Okay, this has already gone on for a while. To summarize, monetary policy tightening will be a key theme for investors in 2022. This meeting was likely the most consequential in a long time, so be sure you get the complete picture. Rate hikes, market yikes. 

Take it Slow — Economic policy is a lot like a first date. You don’t want to come in too hot or too cold, everyone’s nervous, and no one really knows what they’re doing. As such, dating can lead to a few painfully awkward moments here and there, while economic policy leads to a suppressed standard of living and some truly terrible forecasts. Speaking of which, let’s check in with the IMF.

In 2021, the U.S. economy is estimated to have grown at 5.6%. We’ll get the real figures on that later today when the BEA drops the Q4 GDP growth report. Going forward, however, the IMF just days ago adjusted down their full-year GDP outlook for the U.S., seeing a slowdown in growth to 4% in 2022 and a return to normal economic growth for a developed economy thereafter, projecting 2.6% in 2023. This downward revision shouldn’t come as much of a surprise. As outlined in their report, the IMF sees the failure to implement Build Back Better as a key factor holding back previously expected growth for the year. In addition, continued supply-chain backlogs and a rapidly tightening monetary policy are expected to weigh on growth for some time. 

But then again, there are other countries in the world that aren’t the US. Collectively, the IMF projects that global output growth would clock in at 5.9% for 2021, with advanced economies growing by 5.0% and developing markets by 6.5%. India takes the stage by far in growth among large economies, expecting to jump 9% in 2021 and 2022, followed by a slowdown to “only” 7.1% in 2023. Going a little North East, China saw a downward revision as well, expected to grow 8.1% in 2021 and 4.8% this year. The staunch slowdown comes as huge debt bubbles mostly concentrated in the real estate sector pull growth down to more reasonable levels.

Of course, economists are often far better at being wrong than right. This projection directly lines up with the thesis of a world recovering from a pandemic. Let’s just hope I don’t have to say the same thing next year.

Beyond Stocks And Cryptos