Ask any market technician about the late, great, Marty Zweig and you’ll hear about a time-tested set of trading rules that are just as relevant today as they were when Marty first put pen to paper.
For example, the #1 rule: The trend is your friend, don’t fight the tape.
This is at the very heart of technical analysis.
But it is another one of Marty’s rules I want to emphasize today: Don’t fight the Fed.
As predicted the Fed raised rates by 75 basis points (0.75%).
But what else can investors take from last week’s meeting?
The answer is in Powell’s comments during the post-meeting press conference.
Fed chair Jerome Powell made clear to the world exactly what the Fed intends to do.
Let’s review the most important takeaways from Powell’s press conference.
It’s Very Premature.
‘‘It’s very premature to think about a pause in our interest rate hiking cycle.”
There’s not much ambiguity there! Spelled out as clearly as humanly possible…
So for those of you still holding on to the illusion of a dovish pause in the Fed’s rate hiking path, that fantasy has vanished. Poof.
Maybe the next rate hike will only be .50% – it’s possible.
But don’t expect a pause. The Fed will continue to raise the rate until the job is done.
The Fed is focusing on two data points: core inflation and labor market weakness.
These happen to be lagging indicators.
Imagine driving down the street, but while only looking in the rearview mirror. This is what the Fed is doing as it relies on lagging indicators.
That means we’ll probably be well into a recession by the time data reaches the Fed’s targets.
Right now labor markets remain stronger than the Fed would like to see and core inflation (PCE) is trending at a 5% annualized rate – above Fed targets.
So, there is no reason to expect a Fed pause… and forget about an outright pivot.
Higher For Longer.
‘‘The incoming data since our last meeting suggest the terminal rate of Fed Funds will be higher than previously expected, and we will stay the course until the job is done.”
Let me translate: The “terminal rate” is the rate at which the Fed funds rate is expected to peak, before the Fed would begin to reduce it in the future.
The Fed is saying, “Yeah, it’s gonna have to be higher than we previously thought. Oops.”
Therefore, don’t be surprised by a Fed funds rate close to 5% based on current projections.
This matters because the higher the Fed funds rate, the higher the cost to borrow money – auto loans, mortgage rates, credit card interest, bank loans, and so on.
Make it too expensive and consumers and businesses alike stop borrowing.
The Fed wants to slow demand via higher rates to bring inflation under control without grinding the economy to a complete halt.
But don’t make the mistake of believing Powell will back off if he sees the economy spinning into a recession.
He knows exactly what he’s doing and what it will take before he stops.
If inflation remains out of control, he will use every tool at his disposal to attack it.
And if that means serious damage to the U.S. economy, well, that’s the price we’ll pay.
He says so right here.
“Prudent risk management suggests the risks of doing too little are much higher than doing too much… If we were to over-tighten, we could use our tools later on to support the economy. Instead, if we did too little we would risk inflation getting entrenched and that’s a much greater risk for our mandate.”
Powell believes that doing too little is much riskier than doing too much when it comes to fighting inflation.
History suggests he’s right.
Back in the 1970s, then-Fed Chair Paul Volcker made the mistake of backing off his rate-raising policy too soon, allowing inflation to reemerge.
It forced Volker to tighten more aggressively and for longer to tame inflation finally.
Powell has read the book… he is well aware of Volker’s misstep and has no intention of making the same mistakes.
Marty Zweig was right. Don’t fight the Fed.
You can do what you want, it’s your money and you’re all adults.
You’re responsible for your decisions.
But don’t say you weren’t warned.
Until next week, invest wisely…
P.S. To find out how Rowe Wealth can help you profit through whatever the market serves up next, schedule a free 1-hour consultation with us now.
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