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My theory on what happened this week with Fed and markets and where it’s headed
Posted on 7/30/22 at 1:13 am
Posted on 7/30/22 at 1:13 am
Going into his announcement that the Fed was adding .75 to rates Powell knew:
-the markets are down significantly this year
-GDP has had negative growth for two consecutive quarters
-this is the second consecutive “oversize” rate hike
-if the Fed wants to achieve its top priority of getting inflation down to 2-3% there’s a strong chance, if not likely, the Fed will need to increase rates by about another 2-3% (in addition to the .75 hike).
-if he comes out and says “expect another 2-3%” the markets tank and pessimistic sentiment grows exponentially, but if he says “everything is on the table BUT we’re ‘at neutral’ and will have some sensitivity toward economic conditions” then markets will see the best case scenario of just another 1% or so increase is on the table if not likely and he’s bought himself a couple months to see if the inflation genie is getting back in the bottle without the fed spanking the economy.
Basically, he didn’t have to “get mean” this week other than slapping us with another .75.
The markets took Powell at face value, think there’s a great chance this is just a mild recession, and FOMO’d missing “the bottom.”
If I had to bet, I’d bet on inflation sticking significantly above 3% without at least another 2% rate increase, this will be evident to most by September, and whatever the market will have gained between now and then will be erased. If this is the way it plays out and the fed does what’s required, we would then be soundly positioned for a return to a bull market sometime in early ‘23.
Thoughts?
-the markets are down significantly this year
-GDP has had negative growth for two consecutive quarters
-this is the second consecutive “oversize” rate hike
-if the Fed wants to achieve its top priority of getting inflation down to 2-3% there’s a strong chance, if not likely, the Fed will need to increase rates by about another 2-3% (in addition to the .75 hike).
-if he comes out and says “expect another 2-3%” the markets tank and pessimistic sentiment grows exponentially, but if he says “everything is on the table BUT we’re ‘at neutral’ and will have some sensitivity toward economic conditions” then markets will see the best case scenario of just another 1% or so increase is on the table if not likely and he’s bought himself a couple months to see if the inflation genie is getting back in the bottle without the fed spanking the economy.
Basically, he didn’t have to “get mean” this week other than slapping us with another .75.
The markets took Powell at face value, think there’s a great chance this is just a mild recession, and FOMO’d missing “the bottom.”
If I had to bet, I’d bet on inflation sticking significantly above 3% without at least another 2% rate increase, this will be evident to most by September, and whatever the market will have gained between now and then will be erased. If this is the way it plays out and the fed does what’s required, we would then be soundly positioned for a return to a bull market sometime in early ‘23.
Thoughts?
9
Posted on 7/30/22 at 6:28 am to Jon Ham
quote:
will be evident to most by September, and whatever the market will have gained between now and then will be erased. If this is the way it plays out and the fed does what’s required, we would then be soundly positioned for a return to a bull market sometime in early ‘23.
This is where i see the downturn taking grip. Sept's in the market scare the hell out of me. If there will be a time for a bigger dip than June this will be it. I am hopeful by the beginning of next year hopefully some things have started pointing to positive: Russian/Ukraine war, inflation but do see the Housing Market being a burden for a while if Rates keep moving up but Rates should probably be a little higher anyway on that front.
Posted on 7/30/22 at 6:37 am to FLObserver
quote:
if Rates keep moving up but Rates should probably be a little higher anyway on that front.
Aren’t they down to 5.15 on average now? Biggest 1 day drop after gdp number was released?
Posted on 7/30/22 at 7:09 am to Jon Ham
quote:
If I had to bet, I’d bet on inflation sticking significantly above 3% without at least another 2% rate increase
The fed cannot control supply side inflation though. They can only control demand side. Both sides are contributing to the problem.
I think with another 0.5%-1% raise then they’ll have demand under control but core cpi will still be elevated at 4-4.5% even by end of 2023. It’s just something we were gonna have to live with and im betting they’ll say exactly that.
This post was edited on 7/30/22 at 7:10 am
Posted on 7/30/22 at 7:11 am to Lsut81
quote:
Aren’t they down to 5.15 on average now? Biggest 1 day drop after gdp number was released?
I just read that this morning. If it drops below 5 maybe a run by buyers trying to lock in a rate under 5 before more increases.
Posted on 7/30/22 at 7:41 am to Jon Ham
The basis point hikes are akin to a spraying a garden hose on the Twin Towers. We printed too much money
This post was edited on 7/30/22 at 7:43 am
Posted on 7/30/22 at 7:46 am to Shepherd88
quote:
The fed cannot control supply side inflation though.
Supply side inflation is an ignorant term to be honest with you, the rise in the cost of a product due to scarcity is not "inflation" your money is not worth less.
Posted on 7/30/22 at 7:54 am to Strannix
Ehh maybe theoretically but supply side has 100% had a huge effect on the auto market which is included in cpi
Posted on 7/30/22 at 7:59 am to Strannix
quote:
Supply side inflation is an ignorant term to be honest with you, the rise in the cost of a product due to scarcity is not "inflation" your money is not worth less.
although technically you may be correct, the results for most people are the same.
Purchasing power is reduced due to rising prices.
That is MY definition of inflation. Prices are inflated.
Posted on 7/30/22 at 8:01 am to Shepherd88
The auto market is about to experience a widow maker anyway. The United States is full of hyper low IQ consumers living paycheck to paycheck. They were out paying 30% over retail for Kia's. House of cards.
Posted on 7/30/22 at 8:06 am to Guntoter1
Which begs the question why would the government print and give away trillions of dollars to the general public when we all knew there were about to be huge supply chain issues?
Because the money would flow back to corporate interests and frick the wage earning clasd.
Because the money would flow back to corporate interests and frick the wage earning clasd.
Posted on 7/30/22 at 8:18 am to Guntoter1
quote:
Purchasing power is reduced due to rising prices.
That is MY definition of inflation.
Ok well you are free to make up whatever you like in your little world, its a free country.
Posted on 7/30/22 at 8:25 am to Strannix
quote:
why would the government print and give away trillions of dollars to the general public
Well that’s our government for you. They’re still handing out “inflation checks” to try and mitigate it in certain states.
It concerns me that when we have our next economic down cycle 5-10 years from now that they’ll immediately jump to handing out free money again.
This post was edited on 7/30/22 at 8:26 am
Posted on 7/30/22 at 10:08 am to Jon Ham
quote:
Thoughts?
First off, the Fed has stated their desire is to get the FedFund rate back to 3%-4% by the end of the year. This means raising rates anywhere from .5%-1.75% and they have two more meetings (Sept and Nov) in which to accomplish this.
Inflation won't be below 5% by the end of the year and I don't think there's anyone who honestly believes it will be (not even Yellen). The housing market is coming down due to the rate increases and will continue to do so as interest rates rise. Unemployment should start increasing this month with the twin impacts of rate hikes and GDP shrink.
So their most common metrics (new housing, CPI, etc) are all going to be bad, some being less bad than previous (like CPI). I think they'll glom onto any positives in order to just barely get to their FedFund goal (meaning a total of another .5% -.75% increase over the last half of the year), but that really will depend on what numbers they are seeing versus what they are expecting.
This, of course, is also dependent on what the administration does (for example, another hit against NG causing its price to rise is going to fuuuuuuuuuuuuuuuck the markets as energy prices increase even more, especially if it's a cold winter in the Northeast). Biden is hellbent on forcing us into more green energy, regardless of if the tech is really viable or not and regardless of if people really want it or not. His war on O&G will play a large part in how quickly we bounce back from this.
Posted on 7/30/22 at 10:10 am to Strannix
Politicians made millions off Covid. That’s why
Posted on 7/30/22 at 3:16 pm to Shepherd88
quote:
but core cpi will still be elevated at 4-4.5% even by end of 2023. It’s just something we were gonna have to live with and im betting they’ll say exactly that.
Entrenched 4%+ inflation with a tight labor market will continue to result in workers demanding and getting higher pay, businesses having to raise prices as a result, and the inflation beast getting fed into perpetuity.
We can either have stagflation, a significant recession where inflation gets back to baseline, or we have a “soft landing.” A “soft landing” is unlikely which I think Powell acknowledged, and if the fed has to choose between stagflation or getting inflation back to baseline I think they choose the latter.
I know the reaction to Powell’s comments is that it looks like the fed will be “ok” with just another 1% or so hike this year, but I think Powell just didn’t want to push the train off the rails with strong talk.
Posted on 7/30/22 at 3:35 pm to Jon Ham
quote:
a tight labor market
You're thinking the labor market will remain tight? What's in place to make you think that?
We still haven't reached the pre-COVID Labor Force Participation Rate and it's been trending down since March and Weekly Initial Jobless Claims have been slowly trending upward since the beginning of April. Rising interest rates combined with continued high inflation and continued high energy costs should cause jobs to continue to be shed.
Posted on 7/30/22 at 3:49 pm to Jon Ham
Inflation is about to stop. Sales in many areas of the economy are tanking and prices are being lowered. Next is the economic downturn as this will put some people out of business
Posted on 7/30/22 at 4:16 pm to Jon Ham
quote:
Entrenched 4%+ inflation with a tight labor market will continue to result in workers demanding and getting higher pay,
Or big corporations will automate jobs even quicker and replace low skill/ low value jobs. We will have some wage inflation but it’s not going to push the Fed much higher with their rates, the economy just can’t support that nor can the federal government with servicing their own debt.
Posted on 7/30/22 at 5:32 pm to deltaland
quote:
Inflation is about to stop.
Eventually, but not any time soon. We won't see sub-5% inflation until at least next year.
It takes a while for the impact of raising rates to get out into the greater market to the point of impacting Unemployment, CPI, etc.
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