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Stocks Should Fear a Fed That Has the Labor Market on Its Side

Jerome Powell, chairman of the US Federal Reserve, speaks during a recent Senate hearing. Powell said the central bank will keep raising interest rates to tame inflation following the steepest hike in almost three decades.

Jerome Powell, chairman of the US Federal Reserve, speaks during a recent Senate hearing. Powell said the central bank will keep raising interest rates to tame inflation following the steepest hike in almost three decades.

Photographer: Ting Shen/Bloomberg

A nightmare scenario of a resurgent inflation soon after the Fed stops raising interest rates is what Chair Jerome Powell would want to avoid at all costs. Investors have not accounted for a Fed willing to stay the course long after inflation starts falling. And the labor market has given it the green light to do just that. That’s a risk for stocks. 

Imagine the scene: it’s the year 2025. Inflation has come off, yet still running at close to 6%. And Federal Reserve Chair Jerome Powell is giving his semi-annual monetary policy report to Congress as mandated by law. A senator asks him, “Mr. Powell, I feel like it’s the 1970s all over again and I’m talking to the ghost of Arthur Burns who let inflation destroy the economy. In 2022 with unemployment at five-decade lows and inflation at similar levels to today, you chose to stop raising interest rates even though inflation exceeded your target rate. And that’s led us here, with everything increasingly unaffordable for my constituents. Some of them can’t even afford the rent. Why did you do it? Why did you give in to Wall Street, Mr. Powell?”