“The Dude Abides.”
In the 1998 cult classic film “The Big Lebowski,” Jeff Bridges’s iconic character “The Dude” frequently quips “The Dude Abides.” What is meant by this phrase? Succinctly, it means as chaos swirls around him, the Dude remains steadfast and constant in his approach to life and living. It seems to us that the same thing can be said of Federal Reserve Chairman Jerome Powell in his role as the inflation fighting Fed Chair. As market chaos swirls around him, the dude abides!
This past week, Powell threw cold water on the market’s expectations for a rate cut in March, stating:
“Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that.”
To start the year, the market was placing a 90% probability on a March rate cut. We at WealthPlan felt that was a fanciful thought not supported by the data and said so in our note dated January 9, 2024, entitled “Burning Questions into the New Year.” The data simply did not jibe with a Fed rate cut in March. Let’s look at some of the data:
One can see plainly that the decline in inflation has stalled at just over three percent, still well above the Fed’s stated target of two percent. Since showing up late to the inflation fight in 2022, Powell has been resolute and steadfast both in terms of the rhetoric and follow-on rate policy decisions related to inflation. In his August 2022 Jackson Hole speech, he said “The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.” In that same speech, he went on to say “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” Given Powell’s stance and the fact that inflation has stalled at 3%, should people have expected anything else? We don’t think so! The dude abides!
It’s not just an isolated inflation issue, but inflation must be considered in the context of broader economic conditions. Powell framed it nicely in that same 2022 Jackson Hole speech when he said:
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”
So far, the likely pain he alluded to has not manifested in the economy.
- Here is GDP:
2. Here is Employment:
None of the potential economic pain Powell referenced in his speech has manifested. GDP growth is still robust, and the employment rolls are still GROWING: the economy is ADDING JOBS. So, what should we expect from the Fed on interest rates when these economic truth’s prevail: 1) Inflation is stubbornly growing at above three percent, 2) GDP Growth remains healthy and above pre-pandemic levels, and 3) Employment gains, while declining in magnitude, are still positive year over year? We think the picture is crystal clear. Powell and the Fed will remain restrictive until inflation reaches 2% and they are willing to endure far more pain than has been experienced to get there. The dude abides!