The President recently went off about the Fed raising interest rates. He had a lot to say across several TV appearances, one comment being, “The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.”
There is quite a bit of reporting on this, so I’ll try to get straight to the point.
A lot of people agree with how Trump feels (they just communicate it differently). Basically, Trump believes there is no reason to raise rates at this time. The Fed’s dual mandate of low inflation and low unemployment has been achieved and more rate increases only raise the risk of a recession.
This is important because recessions end bull markets. Earlier this month I wrote about how we are tracking recession risk and our new gauge, MONCON.
Thursday morning, CNBC’s Joe Kernan took Trump’s side on this. He agreed with Jim Cramer’s take that Fed Chairman Powell had committed a “rookie mistake” when on October 3rd he told Judy Woodruff that the Fed funds rate was “a long way” from neutral.
That was the comment which touched off the market’s recent volatility. Since then, we’ve seen the DJIA, S&P 500, Nasdaq and Russell 2000 decline significantly.
Wednesday, Cramer suggested all Powell needs to do to stop the market decline is walk back his comments to Woodruff and recommit to the Fed being “data dependent.”
It’s tough to see Powell doing that. You know, egos and all.
If Powell does not walk back his statement, or at least clarify it, the interpretation that markets/investors are making is that so long as GDP growth fits into the Federal Open Market Committee’s (FOMC) definition of “positive” (somewhere between 2-3% GDP growth) the Fed will continue to raise rates…and possibly too much.
This is different from a month ago, where two rate hikes by mid-2019 was pretty much what everyone was expecting. Now, Powell has effectively opened the door to three, four or more in 2019.
Not good. Recession risk increases when inflation and employment are where they should be but the cost of borrowing money increases…because the harder it is to get or afford money, the slower the economy. Think housing and cars – if they become harder to afford, supply outpaces demand and prices go down. I don’t want to dive into an Econ class but that trickles down hard into the general economy.
Since Powell recently indicated that tightening financial conditions on par with early 2016 would be sufficient for a pause, markets and investors are having a HOLY S#!T moment. Why? Because 2016 saw a selloff in equities of 10+%. The market is collectively thinking, “Well if we had a 10% sell off in 2016, we will probably have that again, right?”
BOOM, market sell off AND an extrapolation that there could be another 5% more of loss before a Fed shift in thinking occurs.
I’m in the camp that with the political dynamics currently in play, the Fed rhetoric will settle down and soften the assumptions of over-tightening expectations currently causing problems. I think this means we see a near-term bottom.
No one at the Fed wants to cause a recession by overtightening, but if that happens it’s going to start showing up in our MONCON gauge and it will be very promptly communicated here.
For now, we remain at MONCON 5.
Keep looking forward,
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.