Jerome Powell gave an interesting speech in front of the Economic Club of New York earlier today.

I think that there are at least three main takeaways from this speech that depositors need to consider.

First, the Fed may not be done raising interest rates. The economy is still burning too hot and Powell is still not convinced that he has interest rates under control. Since he feels that the economy has been able to handle higher rates, he will not hesitate to raise rates well above the current 5.25 to 5.50% target. Conventional wisdom that the Fed is done or very near done with raising interest rates could be wrong.

Second, the Fed still has a 2% inflation target but that does not mean that long-term interest rates are going to go back to 2%. Powell does not seem alarmed that the 10-year or 30-year Treasury rates have moved much higher and he is not going to try to manage the long end of the curve in order to keep the cost of capital low for issuers or mortgage borrowers. He believes we are not going back to a disinflationary period, but one where investors will demand a risk premium for lending. (In the 19th to 23rd minutes of the speech, he gives some other possibilities why longer run bonds are moving higher).

Third, Powell says that the state of the banking system is very strong. He believes that banks, in general, have very strong balance sheets and the failures of Silicon Valley Bank and Republic Bank were not harbingers of an imminent banking crisis in late 2023 or 2024. (This is after the 34th minute).

Among all of Powell's speeches, this was his most candid. He also gave the most insight into all of the factors that the Fed considers in interest rate policy. Those interested in Fed policy may find it worthwhile to watch the entire speech below.

The Federal Reserve concluded its September 2023 meeting today, holding the Fed Funds rate at its current 5.25% to 5.50% target. The target rate remains at a 22 year high.

Fed Chair Jerome Powell did not declare victory in the war on inflation, leaving the possibility of another quarter point hike at its next meeting in November on the table. The average Fed target of Fed voting members for the end of 2024 has gone up to 5.10% from 4.60%, and many Fed voting members believe that there will be no change in the Fed funds rate before 2025. This high or higher for longer is the Fed's message.

Still, there are plenty of reasons why the Fed may declare victory on inflation sooner and begin to lower rates (as I discussed in this recent article).

The rising price of oil over the last couple of weeks creates a new wrinkle for the economy and complicates efforts to drive down inflation.

In the immediate aftermath of today's announcement, 2-year and 10-year US Treasuries hit their highest yields in over 14 years (over 5.15% and 4.35%, respectively). There are lots of competitive short-term CD rates today, but we expect more banks to now offer more competitive longer term CDs rates.

Compare 1-year CD rates.

Compare 2-year CD rates.

Compare 5-year CD rates.

I am fairly sure that we would not be in quite the dire climate catastrophe that we are in now if Al Gore had won the 2000 US Presidential election (and as a corollary, I blame Ralph Nader's maniacal third party candidacy for the current situation). But, that is backwards looking.

Looking forward, I am absolutely sure that the fossil fuels industry cannot be counted on for solutions to climate change. I have seen through my work in the industry over the last few decades that it is comprised of not very creative people whose business it is to focus myopically on extraction and refinement. Absent regulation with significant penalties, the industry has done very little over this time to properly handle methane (a harmful by-product of their production). Much of the industry's research into things like algae and direct air capture could be better characterized as straight out green washing designed to justify unabated continuation and growth of the extraction and refinement businesses.

There are, of course, some notable exemptions to this. Both Orsted and Iberdrola completely transformed themselves to work in the wind industry, with Orsted quickly disposing of all of its oil producing assets and Iberdrola doing it in a slower manner. But, it takes a complete conversion away from fossil fuels for a company to become part of the solution and free itself of the carbon lobby and not many corporate leaders are willing to - or can - take that step.

Hence, we find ourselves in a ridiculous position where we are in the midst of a climate crisis and the UN and the Biden Administration, under John Kerry's direction, are allowing the world's major oil producing companies to control the narrative around climate change solutions (and conferences that provide the only global dialogue, like COP27 and COP28). Every day it continues, our children are victims of a global strategy of blocking and delaying.

Therefore, I was pleased to see that the Financial Times reported that Al Gore came out forcefully yesterday when he stated: "It is rather absurd that the world has to go and beg Saudi Arabia for permission, please, to talk about solutions to the climate crisis."

The same FT article points out that Al Gore's Generation Asset Management produced a report indicating that wind and solar, together with heat pumps and electric vehicles, can meet all new energy demand.

Al Gore is quoted as being optimistic that the report bodes well for our future. It is human nature to be optimistic, and we all should be since humans have the tools and capacity to solve these issues. However, the facts remain that we need to move faster than ever to convert the global economy from carbon.

It is going to be disruptive to break the global stranglehold of the fossil fuel industry and certain major global banks that is preventing us from getting going on this. But, it is going to be disruptive for our financial system if our ecosystem is completely destroyed. Al Gore is not providing a comprehensive solution here, but removing fossil fuel companies from the equation is absolutely necessary to focus on producing solutions that force banks and other global institutions to move rapidly.