It’s As Simple As Following Price

September 22, 2022  |  Michael Reilly

YOU DON’T FIGHT THE FED. It’s a long-standing market adage. 

But so too should be: FOLLOW PRICE. At the end of the day, only price matters. 

I bring that to your attention as an important, critical reminder to never lose sight of what’s important. 

Because, regardless of all the talk of rate hikes, recessions, housing, or employment, following and adapting to price is what gets you paid.

With that said, today we’ll be brief and to the point – there’s no reason to get caught up in all the nuances of yesterday’s FOMC meeting.

Yesterday, with an aim for full employment and low inflation, the Federal Open Market Committee (FOMC) raised interest rates by an additional 0.75% – or 75bps. 

I think we can all agree the FOMC was asleep at the wheel as inflation rocketed to 40-year highs and now it’s forced to take an aggressive stance in order to reel it in now – hence the continued push to higher rates.

Powell essentially said yesterday that we need to “keep at it” until inflation is down to 2%. And that our monetary policy tightening will be enough to restore price stability.’

Let’s put 2% inflation into perspective…

Our current rate of inflation is over 8% which means we’ll need to be much tighter for much longer. 

And that’s why things can get a little dicey. 

It’s important to understand that markets first care about the shock, which is best represented by the momentum or the rate of change in interest rates. 

In other words, how quickly rates are rising. The fact is, we’ve had higher rates before and markets have handled it well. 

But if you drink from a fire hose, you’re gonna drown. 

And after the shock, markets care about time. 

How long before we see a change to the current monetary policy?

The longer higher rates persist, the more difficult it can be to escape their impact.

Yesterday, Powell made reference to the inflation of the late 70s and Fed Chair Volcker’s efforts to bring down inflation.

Without boring you to death with a full-blown history lesson, I’ll sum it up by saying that the Volker team learned that easing up on rates too soon allowed inflation to reemerge. 

Volker became Chair and responded swiftly to out-of-control inflation. But as soon as inflation slowed down, rates were swiftly cut. 

Big mistake. Inflation surged again. 

This exercise was repeated a couple of times and it ended up taking more than three years to finally get inflation back to acceptable levels.

Fast forward to today…

Powell knows his Fed history. And he doesn’t want to fall into the same trap.

So you can expect higher rates for longer. Powell knows it’s going to hurt the private sector…  he’s said as much.

There are many numbers we can keep as an indicator that we’re getting close to the end, but perhaps employment numbers are one of the biggest. Until unemployment picks up, prepare for more of the same.

Bottom line? 

Yes, all this sounds ominous. However, I’ll remind you, FOLLOW PRICE.

Allocate your capital to where it is treated the best and always remember to manage your risk.

Until next time…






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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