When Rate Cuts Come: Reflections on Powell’s Jackson Hole Speech

Friday Fed Chair Powell said, "The time has come for policy to adjust."

So, it seems we are on the brink of some changes in interest rate direction.

The whole speech had me thinking of two quotes that ramble around in my head.

"When the facts change, I change my mind. What do you do, sir?"

And

"Just the facts, ma'am"

So, I fact checked my memory of the quotes and as usual (no longer to my astonishment), I don’t have the facts quite right in my head regarding the quotes. ChatGPT suggests:

1. "When the facts change, I change my mind. What do you do, sir?" is commonly attributed to the economist John Maynard Keynes. However, the exact phrasing and whether Keynes actually said it has been debated, and some suggest that the quote might be apocryphal. The saying embodies the idea of adaptability and the willingness to revise one’s opinions or strategies in light of new evidence or information.
   
   
2. "Just the facts, ma'am" is famously associated with the 1950s television show Dragnet, particularly with the character Sergeant Joe Friday, played by Jack Webb. Although the exact phrase "Just the facts, ma'am" was never actually spoken verbatim in the show, it became widely attributed to the character due to his no-nonsense, straightforward style of questioning. In reality, the closest phrases used were "All we want are the facts, ma'am" or "All we know are the facts, ma'am." The phrase has since become part of pop culture, symbolizing a direct and fact-focused approach to inquiry.

I have a soft spot for the tough role of Fed Chairman due to the overlap I feel as Chief Investment Officer at Members’ Wealth. A Fed Chairman is expected to make real-time forward-looking decisions about the future based on delayed and often gray facts about the past and present. Then although most everyone agrees that no one can predict the future, the Fed Chairman is judged on the impossible to predict future outcomes of his/her now historical decisions.

Between Powell’s comments and my cloudy recollection of quotes, I would like to think of Friday’s whole Jackson Hole speech as a referendum on intellectual humility and the importance of being open to changing one’s mind when faced with new, reliable data or a better understanding of the situation. Basically, flexibility and responsiveness to new facts are crucial.

Responsiveness vs Predictiveness. Wait which is it that we want from Our Fed Chair? This was some real humility interwoven into a victory(?) speech by Powell this week. And while I am sure everyone will have their opinions on how he did, I for one, like to give him a little bit of forgiveness.

Some notable takeaway quotes[i]:

“The good ship Transitory[ii] was a crowded one,” Powell quipped to laughter from attendees, “with most mainstream analysts and advanced-economy central bankers on board. I think I see some former shipmates out there today.”

“The FOMC did not flinch from carrying out our responsibilities, and our actions forcefully demonstrated our commitment to restoring price stability,” he said. “An important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack.”

“Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” he said. “While the task is not complete, we have made a good deal of progress toward that outcome.”

From my read/listen of the speech he did not say when he would be cutting rates just that there is more of a case today to cut rates than there was over the last few years. Most experts are saying September is a sure thing with the debate now going to whether the rates will be cut 25 or 50 basis points. (Hopefully, they are not the same experts who were telling us all along that we would have rate cuts earlier than this.)

In summary:

Powell recalled the past, noted his inaccuracies, and how he adjusted for new data. He then told us, as usual, he is prepared to respond in the future based on the then current data. Interestingly though, the market experts like to take his preparedness as a means for predicting. As I have noted before, there are those that predict and those that prepare, we prefer to be prepared. So Does Powell. The rest of the “experts” prefer the predicting.

More specifically…

1. Historically: He said inflation was transitory, he was wrong. He cut his losses and increased rates fast, really fast.
2. Currently: Inflation now seems to be in check. The economy did not fall off a cliff. Time to focus on jobs.
3. Respectfully: He was humble. He admitted mistakes. He did not freeze or go into analysis paralysis or double down on his now with the benefit of hindsight wrong convictions. He reassessed, changed course, got aggressive, got it right.

Seems about right: Gather the facts, make a decision, assess the outcome, and if it's off, adjust and get it right. Let your winners run for a while, claim a small victory, then return to the data and communicate clearly at every step.

Personally, I'm not a fan of rate cuts as lower rates make it harder to earn decent interest on safe assets for our investors. So, if you are still sitting on cash anywhere that is not earning 4-5% or where you are sitting on cash earning 4-5%, you should be very mindful that the risk of rates dropping is now more real than it has been.

[i] Fed Chair Powell indicates interest rate cuts ahead: ‘The time has come for policy to adjust’ - Published Fri, Aug 23 202410:00 AM EDT Jef Cox at CNBC

[ii] The "Good Ship Lollipop" is a famous song from the 1934 movie Bright Eyes, sung by Shirley Temple, who was one of the biggest child stars of the time. The song became one of her signature pieces and is often associated with her image of innocence and optimism during the Great Depression. The lyrics describe a dreamlike journey on a candy-filled ship, representing a world of sweetness and joy.

In contrast, the "Good Ship Transitory" is a more modern and often ironic reference, likely used to comment on something that is temporary or fleeting. It plays on the nostalgic and upbeat connotations of the "Good Ship Lollipop" but gives it a twist, suggesting that whatever is being referred to as "transitory" might not last or might not be as sweet as it seems. This could be used in economic discussions (such as referring to transitory inflation) or in social or political commentary to suggest that something currently happening is only temporary and not necessarily positive. The juxtaposition between the two ships highlights the difference between an idealized, carefree world and the often more complex, less permanent realities of the present.

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About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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