There he is.
Give him a good look.
Do you know who this is? You can make the argument he's the most powerful person in Washington and the majority of Americans wouldn't know it if he walked past them on the street. Surveys taken in the past have found that less than 24% of Americans can correctly identify who this is.
Here's a hint: He's not a fan of inflation.
Why is Jerome so important? He is the chairman of the Federal Reserve, the committee who's purpose it is to maintain stable levels of employment and price stability in the economy.
Powell and his committee are responsible for setting the interest rates for borrowing capital. Since the Great Financial Crisis in 2008, rates have been set at historic low levels, primarily to help keep the economy on its feet as it rebounded through economic despair not seen since the Great Depression.
When the COVID pandemic rolled through in 2020, interest rates were cut to almost 0, meaning the cost of borrowing money was free. This action, coupled with the stimmy checks sent to households was a bazooka of stimulus the economy is still digesting. Due to the high amounts of new money thrown into the system, and the cost of borrowing money effectively 0, we have now been thrown into a highly inflationary economic environment this past year.
In order to combat this inflation, Jerome Powell has been raising rates back up to levels we have not seen in over a decade.
In college, my ECON 101 professor explained the role of the Federal Reserve chairman as the chaperone at a party.
Think of interest rates as the "punch bowl" at the party.
When rates are low, we're letting the punch bowl flow. The cost of borrowing money is low, so we can borrow more and invest into businesses and economic growth at a much easier rate.
But. Just like that punch bowl at the party, too much of the low-rate environment can lead to a nasty hangover. That hangover shows itself in the economy as inflation.
And boy did we party.
It's been impossible not to notice inflation this year, we've been hammered with headlines showing the rising prices of food, gas, services, you name it. There was just so much demand, without the supply to match it. So Jerome has been taking that punch bowl away from us.
In fact, he didn't just take it away, he dumped it on the floor, turned the lights on, cut the music, and told everyone to get the hell out of here.
From March to September this year, the Fed has raised rates over 2.3%. That is the FASTEST the Fed has ever raised rates in any period in history.
Check out the below two charts from Visual Capitalist that shows just how insane this year has been from a rate perspective compared to other tightening cycles.
The duration of this tightening cycle is so historically fast and intense, we have no other period of history to even compare it to, meaning we don't really know what's in store for the economy 6-12 months from now as this policy starts to play out.
Rate movement from the Federal Reserve usually has a 6-12 month lag for its impact to be seen in the economy.
Check out how long the prior tightening cycles were in the past:
The Fed Chair's Influence
So now that we've covered what Jerome Powell does and why he is so important, I wanted to highlight just how influential he can be.
Jerome spoke yesterday at the Brookings Institute for a scheduled brief to the media on his viewpoint of the economy. In this speech, he gave some insight into what the Fed is planning on doing for the December meeting where they will be announcing the future rate hike plans.
It is shocking to watch the stock market react to Powell's comments in real time.
Check out this chart of the Nasdaq yesterday.
Can you guess what time Jerome took the Mic?
It didn't just send tech stocks higher either. Look at the rest of the major indexes.
Believe it or not, there are literally billions of dollars being traded in stocks by computer algorithms, listening and computing to the dialogue of every word that Powell says.
The reason stocks rallied yesterday was primarily due to Powell's comments around the expectations of where we are in the rate hiking cycle. Although we have aggressively raised rates, Powell hinted at a "moderation" of the levels of increases to rates. He also confirmed that the Fed will only be raising by.5 % vs the possibility of .75%.
This then caused large asset allocators and investors to pour into stocks that were further along the risk curve, with more growth potential. This is because traditionally, these stocks perform better in lower rate environments than higher rate environments.
It's important to keep in mind however that this market is so fickle, and so dependent on whatever the Fed says.
If we see inflation come in unexpectedly high in the coming weeks, and Powell takes the stage indicating the job's not finished on the battle for inflation, we will see all of these gains and then some washed from the market.
Fortunately, Powell and the Fed are extremely conscious of how impactful their words are to the economy, and they are very choreographed in when and what they say.
As long as Elon doesn't hand Powell an iPhone and a Twitter Account to start rattling off daily tweets on where he thinks the next rate hike will go, we should be okay.
It will be fascinating to see how the remainder of the year plays out for the market, and how the impacts of these never-before-seen rate hikes spill into the economy.
I'll be watching with my cup of punch in hand.
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