Analysis of Federal Reserve's Impact on Economy and Financial Markets

In continuing "higher for longer", the gravitational force weighing on the economy from current elevated interest rates will compound, resulting in "weaker for longer" economic growth. Powell knows this and re-emphasized (once again) that the full force -- i.e., the lag effect -- of the Fed's hiking & tightening regime has not yet manifested. Key takeaway: conditions are going to get harder from here, especially through next year.

The Fed is expecting the labor market weaken and unemployment to rise. I agree with this forecast, though the Fed's projected 2024 unemployment rate of 4.1% seems far too rosy, IMO. We are already at 3.8% in October 2023 and, as mentioned, the lag effect has yet to substantially materialize. Consumer spending will likely slow, corp profits will likely be further pinched, layoffs will likely rise -- and if a recession hits (which I think is likely but the Fed is trying to downplay), then the employment situation gets a lot worse.

Interestingly, when asked directly, Powell downplayed expectations of a "soft landing". He said it still "possible", but his Fed-speak strongly suggested that he thinks the firmness of the Fed's policies will result in a harder-landing.

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