Using All the Tools in the Toolbox

Using All the Tools in the Toolbox

September 13, 2022

It may come as no surprise to long-term investors - with an adult memory - what we have witnessed since Federal Reserve Chairman (Jerome Powell) spoke in Wyoming on August 26, 2022, was a deliberate use of another tool in his “inflation fighting” toolbox.  His quote – spewed by almost every financial media outlet – "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain." And there it is, the next tool.

You may be wondering what type of tool was deployed – the verbal fear factor.  Again, you may be asking, how can these simple words affect us as investors?  We will get to that in a moment.

Since that speech, the equity markets have given back most of the recovery since the early June Fed Meeting – roughly 17% increase.  To reinforce the purpose of this tool, Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis said in an interview. "I was actually happy to see how Chair Powell's Jackson Hole speech was received, people now understand the seriousness of our commitment to getting inflation back down to 2%." 

Furthermore, in April, Bill Dudley, the former New York Federal Reserve president, wrote an article titled “If Stocks Don’t Fall, the Fed Needs to Force Them” saying that part of the Fed’s goal when raising interest rates should be to reduce stock prices because they influence how Americans feel about their wealth and, therefore, how they spend.  Can we agree that the Fed, in general, is doing a virtual “happy dance?”

Now, to answer the question regarding how it affects us as investors? Simply stated - in the short-run, continued temporary dips (or their words, “pain”) and increased volatility in the overall portfolios of investors.  In the longer-run, nothing changes - as we know, with history as our guide – these events have eventually brought higher portfolio values for those who have adhered to their plan.  Said another way – emotionally anchored to their plan.

How so? With Patience and Discipline.  Say it with me; if your plan hasn’t changed…your portfolio doesn’t change.  And to those who don’t have a plan, the crisis of the day – which the financial media will always have ready and waiting - becomes their plan.  And human nature’s tendency is to continually react to the emotional click bait served daily – notice the key word from the quote…Americans feel.

By the way, if one is searching for the perfect formula for a lifetime of underperformance – this is it.


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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.