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JPOW: THE SILVER TONGUE 👅

Economics 101 — a lesson in setting expectations from Fed Chair Jerome Powell

I. Inflation & Interest Rates ⚖️

Interest rates baby. The Federal government’s way of cooling down the economy when it gets too hot; like a stiff glass of ice cold water on a steamy day. 🧊🥵

Personally, I kinda like to think of it as a little seesaw — when inflation goes up, the government tries to slow it down by hiking interest rates. Picture it like this:

Right now, as you know, inflation is still pretty bad; and the Fed has spent the last year increasing rates to try & offset it. In fact, since inflation peaked at 9.1% in June of last year, we’ve seen the most aggressive pace of interest rate hikes in US history. (inflation YoY now sits at 6.09%, which is better, but still not great).

Importantly, the interest rates thing is kind of a necessary evil for the long-term health of the economy. And when interest rates go up, people start gettin unhappy.🤬

So it’s gotta be done carefully… enter the FOMC.

II. Setting Expectations 🪒

To manage interest rate expectations, the Fed’s greatest tool is its 8 Federal Open Market Committee (FOMC) meetings each year — where basically all the Federal Reserve’s head honcho’s get together, put a finger to the wind, and decide what to do with interest rates & the economy.

Then at the end of each one, the Fed Chair (Jerome Powell) does a little press conference to try and explain what tf is going on. Of course, these press conferences tend to be pretty stuffy, with canned remarks about the ~state of the economy~. TBH, JPow usually just does his best to avoid saying anything remarkable, lest people react by pulling their money out of the banks / markets & tanking the economy further.

That’s the JPow lesson here: if you don’t say anything remarkable at surface level, then people can’t act on it as easily. I mean, the Fed’s whole goal here is to reduce economic activity to quell inflation, and Jerome Powell has gotten pretty good at saying less. 🫥

But this week’s FOMC press conference was a different setup than the rest — with so many rate hikes so far this year (9 straight hikes over the past 9 FOMC meetings) — plus the banking fiasco of the past few weeks — JPow had no choice but to go up there and put on a show. It was arguably his most important press conference in recent history. It could cause (or prevent) a full-on market crisis.

He chose his words carefully, and the market reacted modestly. At surface level, it was pretty vanilla, and a stock market catastrophe was avoided (for now 😉).

But, as usual, it seemed like there was more than meets the eye here. So we decided to take a closer look into the exact verbage used, to see how it compares to previous FOMC guidance, and decide what it means for the markets ahead… 👀

III. Analyzing Jerome Powell’s Remarks 🔍

First, we transcribed JPow’s remarks and did a quick analysis of the words he used most often. Nothing crazy. And looking at the data, it’s pretty much in line with what you’d expect: 👇

You’ll note that he used the word ‘inflation’ 20 times in his 9-minutes of prepared remarks.1 He mentioned ‘banking’ & the ‘banking system’ 8 & 6 times each (respectively). He threw in ‘price stability’ 6 times, and ‘labor’ 8 times.

Again, pretty vanilla. Just the way he likes it.

BUT if you compare this verbage to the types of words used in his previous press conferences, you’ll begin to notice that things aren’t quite vanilla at all.. let’s see 👇

IV. Six Words to Sum it All Up 📈

We went through all words used during Jerome Powell’s last 3 FOMC press conferences (November, December, and February), and plotted out the frequency of each word relative to this week’s press conference.

While there was plenty to note, I want to focus on 6 key terms that I think paint the best picture of where Jerome Powell is at rn (and where the economy is going)… 🛣️

1. ‘Banking System’ 🚩

• Importantly, JPow never mentioned the banking system even ONCE at his past 3 press conferences. But with more than a handful of the country’s major banks on the verge of emminent collapse, this time he had no choice but to address them. Here’s his take home:

• TRANSLATION: this could (probably) be the highest interest rates get

2. ‘Labor Market’ 🚩

• This time he was increasingly adamant about the role of employment on inflation and economy. In his words:

• TRANSLATION: some of you mf’s are gonna have to get laid off for me to turn this boat around

3. ‘Committed’ 🚩

• JPow was extra keen on the word “committed” this time around; much more so than in previous press conferences. As in:

• TRANSLATION: I want you to think I might keep hiking interest rates, just so you don’t do anything crazy (like another bank run)

4. ‘Inflation’ 🫥

• Interestingly, while Jerome mentioned inflation some 20x this time, this was down from his typical clip of mentioning inflation 25-30x per press conference.

• TRANSLATION: I am so sick of talking about this inflation BS I’ll just avoid saying it all together if I can

5. ‘Monetary Policy’ 🫥

• The key piece everyone was waiting for here was the FOMC’s rate hike amount — ie. the ‘monetary policy’. They ended up hiking rates by 25bps, said here:

6. ‘Sufficiently Restrictive’ 🫥

• This was something Jerome avoided saying altogether, for the first time in months. Again, perhaps because he doesn’t want us to think that rate hikes are over just yet — he’s keeping his options open here:

• TRANSLATION: rate hikes seem like they’re basically over but I want to leave some room on the table in case we gotta hike ‘em further

V. The Takeaway 📨

To summarize; based on our forensic analysis of Jerome Powell’s careful vocabulary in comparison to previous press conferences, here’s our takeaways:

• Rates are about as high as they’re gonna get, or at least close 🌡️

• The FOMC knows more hikes could cause a rash stock market reaction, and they’re trying to avoid any panic here (exacerbated by the banking fiasco) 💊

• At the same time, inflation may just keep sticking around, so the FOMC wants to leave some room for one final hike just in case. ⚠️

Anyways, that’s all for today folks. If there was a way we could get inside Jerome Powell’s head and analyze his thoughts & dreams, we probably would. For now, this will have to suffice. Thanks. ✌️

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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