The Federal Reserve often communicates to Wall Street in oblique ways, through policy speeches that get scant coverage in the media. We witnessed one of those trial balloons Thursday, with the remarks of Austan D. Goolsbee, president of the Federal Reserve Bank of Chicago.

Goolsbee delivered a policy speech and participated in a moderated question-and-answer session at the Peterson Institute for International Economics on September 28. Investors took heart from his words, interpreting them as dovish. U.S. Treasury yields fell and stocks rose.

Golsbee paid obligatory fealty to the Fed’s inflation-fighting mandate, stating that the Fed will do whatever is necessary to curb inflation. However, he also emphasized that the central bank can fight inflation without tipping the economy into a recession, as long as it doesn’t hike interest rates more than necessary.

“We will get inflation back to our target, whatever that takes. Inflation still needs to come down,” Goolsbee said. “But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks: to defeat inflation without tanking the economy.”

Goolsbee noted that inflation has fallen substantially, running at 2.4% on a three-month annualized basis as measured by the consumer price index. He pointed to the easing of pandemic-induced disruptions as the major reason.

Goolsbee asserted that the Fed should be able to reduce inflation while avoiding a recession, now that supply chain bottlenecks are getting resolved and demand is becoming more stable.

“These factors also argue against putting too much weight on the idea that strong labor market and growth conditions will necessarily stall out the disinflationary process,” Goolsbee said. “Doing so risks policy overshooting and unnecessarily derailing the expansion.”

These sentiments were music to Wall Street’s ears. In the wake of Goolsbee’s remarks Thursday, U.S. Treasury yields retreated and stocks rebounded across the board.

The bullishness didn’t last, thanks to the U.S. House of Representatives.

The main U.S. stock market indices opened sharply higher on Friday. At session highs, the Dow Jones Industrial Average was up by 0.7% and the S&P 500 had climbed 0.8%. At its apex during the trading session, the tech-heavy NASDAQ had rallied by 1.4%.

However, stocks lost ground in late afternoon trading, as political wrangling on Capitol Hill came to naught and a federal government shutdown seemed inevitable. The equity benchmarks ended mostly in the red, as follows:

• DJIA: -0.47%
• S&P 500: -0.27%
• NASDAQ: +0.14%
• Russell 2000: -0.51%

The TNX slipped 0.52% to close at 4.57%. Friday’s equity declines capped a losing week, in a losing September.

Mishigas in the House…

There’s a Yiddish term for what’s going on in Congress right now: mishigas. It means craziness.

Let’s put aside the Biden impeachment clown show (the less said, the better) and focus on the impending federal government shutdown.

Congress has scant time remaining to avoid a shutdown, and it still doesn’t have a budget plan. Government funding expires at 12:01 a.m. ET Sunday.

The Senate has been cobbling together a bipartisan bill to fund the government through Nov. 17, which should pass in the coming days, though perhaps not before the weekend deadline. At the same time, far-right House Republicans are pushing for extremely deep spending cuts, insisting they’ll refuse to support the Senate bill or any short-term legislation that would buy Congress more time to act.

The House late Friday afternoon failed to pass a short-term spending bill that would have averted a shutdown. Meanwhile, the enemies of House Speaker Kevin McCarthy (R-CA) are getting ready to oust him, regardless of how the budget impasse turns out.

As a Star Trek fan, I’m reminded of the “Kobayashi Maru” training exercise, designed to test the character of Starfleet Academy cadets by presenting them with a no-win scenario. There will be no winners from the brinkmanship over the budget.

WATCH THIS VIDEO: Assessing The Latest Risks to The Rally

The stock market is likely to react negatively to a shutdown. The increasing odds of a shutdown already have been a major factor in the decline of equities in September.

Another reason for the market’s swoon this month has been seasonality. September historically has been the worst month for stocks.

However, once we get past these short-term threats, the fundamentals should fuel an upward trajectory for equities. We’re witnessing a resilient economy and improving corporate earnings, but as Goolsbee noted, an economic “soft landing” seems to be in the cards.

On Friday, we also received good news about the consumer. The University of Michigan reported that consumer sentiment rose to 68.1 versus 67.7 expected (see chart).

And inflation hawks got some really good news on Friday, when the Commerce Department reported that the personal consumption expenditures price index (PCE), the Fed’s preferred inflation metric, rose at its slowest pace since September 2021 during August.

The PCE grew 3.5% year over year in August, up from 3.4% the month prior and in line with consensus expectations.

“Core” PCE, which excludes the volatile food and energy segments, grew 3.9% in August, down from 4.1% in the previous month and in line with expectations. On a monthly basis, core PCE rose 0.1% in August, down from 0.2% in July.

Core PCE is the inflation measurement most often cited by Fed Chair Jerome Powell, and its reading for August is bullish for stocks.

Investors should sit tight, refrain from reacting impulsively to the headlines, and wait for these near-term headwinds to dissipate.

That said, if you’re still spooked by market uncertainty, consider the advice of my colleague, Jim Pearce.

Jim Pearce is the chief investment strategist of our flagship publication, Personal Finance. Jim started his career as a stock broker more than 40 years ago. If anyone understands fundamentals, it’s Jim.

Jim has unearthed a once “secret” income power play that’s giving everyday investors the opportunity to collect huge payouts, regardless of Fed policy or the ups and downs of the markets. To claim your share, click here.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: