| Here we sit on the cusp of another interest rate decision.
The market has very much concluded that the Fed will hike 25-basis points and I don’t disagree. Some data has softened, and headline inflation has indeed cooled down a bit.
Assuming the Fed delivers, then the real attention will be on Powell’s post-meeting comments at 2:30 P.M. Eastern. That’s where he can set the tone to buy time to see how the hikes they have enacted so far has impacted the economy.
And I believe that tone will be hawkish.
Over the past year, the Federal Reserve has embarked on the single most aggressive rate hike campaign in history. And yet, consumer lending has soared, the economy expanded at a brisk pace over the last two quarters, consumers remain confident, and financial conditions have eased substantially.
Plus, gas prices are ticking higher, everyone sees soaring egg prices as symptomatic of something more than sick birds, and the dollar weakness of the last six months means the U.S. is now importing inflation.
Oh, and China is back in business.
I also think that Powell is especially concerned with exceptionally tight labor conditions. We haven’t experienced an unemployment rate lower than 4% since Baby Boomers were being born in the 50s. And now that they are retiring, we will continue to have the same systemic shortages in labor that we had during the post-WWII boom that brought them into the world.
In addition to all this, the Fed is in a relative interest rate parity battle with every other major central bank. They are fighting to be the cleanest dirty shirt in the laundry basket-case of global central banks. To turn timid now would cede the high ground in the battle for reserve currency dominance (even though that doesn’t mean what it used to mean).
And it’s all these “yeah, buts” that make me think there’s a slight chance Powell could surprise the markets with 50 basis points instead. I don’t think it’s worth betting on in advance. But with both equity and bond markets betting that the Fed will tuck tail and run on inflation (which is truly unprecedented), he would get more tightening bang out of his rate hike buck by giving them something they don’t expect.
Despite all this noise, there is still value to be found and profit from, provided you keep your eyes looking a few months forward. And spotting those opportunities today is how you build a portfolio that pays for tomorrow.
That’s why I’d encourage you to check out Garret Baldwin’s latest report. I got a sneak peek earlier today and, believe me, it’s not something you’re not going to want to miss. He offers some true insight into a sector most of us have forgotten about in the age of FANG stocks, so I encourage you to give it a read.
Take What the Markets Give You.
Don Yocham | | | | |
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