Jerome Powell and The Federal Reserve FMOC have 7 days until their next Fed Funds Rate decision. In this period of time they will need to decide if they are truly committed to snuffing out inflation regardless of the economic impact.
Jerome Powell, Chair of The US Federal Reserve Bank (photo credit: zentaurios.app)
Inflation Remains High
The current Consumer Price Index (CPI) sets the annual inflation rate in the U.S. at approximately 4.9% (if you believe the cooked number). This is still well elevated over the stated 2% target of the Federal Reserve. Furthermore, the bullwhip effect has brought inflation back in certain areas of the economy that previous had shown disinflationary or even deflationary moves. These were in areas such as housing, energy, and some goods. The aggregate demand in the market is still alive and well. Car dealers are selling used cars at nearly the same price as brand new ones because the new ones take weeks or even months to get delivered. Consumers continue to purchase them. And banks continue to lend at high rates despite the increases in late payments on auto loans and car repossessions.
"Ally Financial said in its October earnings report that it expects auto loan delinquencies to increase to as much as 3.8% compared with 3.1% in 2019, leading to more repossessions.”
https://www.findthebestcarprice.com/car-loan-repo-stats/
Consumer credit (debt) is piling up as folks continue to live at the same standard of living despite real wages (ie - inflation adjusted) declining for almost 2 years straight. This means prices are going up faster than people’s salaries and they continue to fall behind.
The labor market remains strong despite the Federal Reserve’s rate hiking campaign. Companies have been trimming the workforce but not enough to make an impact on aggregate demand in the economy. This means price pressures will continue to the upside with only pockets of relief from supply chain effects.
What Will The Fed Do?
Last meeting the market got what they considered a “dovish hike”. This means Wall Street feels that was the last interest rate increase. However, with recent economic data taken into account, it is more likely now that the Federal Reserve increases rates again. What are the fourscenarios:
- Federal Reserve hikes and leaves the door open to more
- Federal Reserve hikes and signals it thinks this is the end
- Federal Reserve pauses but leaves the door open to resuming rate hikes
- Federal Reserve pauses and says they’re done
*A rate cut is a 1% chance and only happens if the Federal Reserve thinks the economy is falling apart.
Scenario 1 - Federal Reserve hikes and leaves the door open to more (most likely)
This is what they should do. Inflation remains high and aggregate demand continue to pressure prices higher. The labor market is still way too tight to have any kind of impact on demand and consumer behavior.
Result: Inflation sensitive investments like gold, silver, Bitcoin, oil, etc. should sell off
Scenario 2 - Federal Reserve hikes and signals it thinks this is the end (second most likely)
This is the hopes of the soft landing scenario. The Federal Reserve feels its’ job is done, inflation will continue coasting lower and the economy is still in tact.
Result: Inflation sensitive investments will go to the moon along will all other risk assets. Any near-term weakness should be bought.
Scenario 3 - Federal Reserve pauses but leaves the door open to resuming rate hikes (unlikely)
This would be a very confusing result and I would actually think is very unlikely. I don’t foresee the Fed pausing and waiting just to begin hiking again. Everything Jerome Powell has signaled is that he is committed to stopping inflation. This means rate hikes until the job is done (meaning something breaks in the economy).
Result: High volatility back and forth. I would probably avoid taking any kind of action or deviating from an investment plan you already have in place because of this news.
Scenario 4 - Federal Reserve pauses and says they’re done (highly unlikely)
The Federal Reserve pausing now with inflation numbers still strong will be a huge red flag. It’s almost as damning as them cutting rates suddenly. If this happens, something is very wrong under the hood of the financial sector.
Result: Initial euphoric rise higher in risk assets…then crash (this is what I anticipate will eventually happen but not at this meeting).
The Take-home
I still think the likely movement for anarchist investor favorite investments like crypto and precious metals is lower. There may be some bumps back and forth but these elevated levels can only be sustained if inflation begins to creep back into the picture. You can add in the regulatory issues in the crypto space recently (SEC Sues Binance & Coinbase). Bitcoin has been resilient despite the risks which may mean that a lot of crypto investors are moving out of coins and into Bitcoin as a safe haven.
Don’t get overly exuberant either way and make calculated decisions. I am still waiting for lower prices on Bitcoin, Gold, Silver, and other assets to start building my model portfolio.
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***Keep in mind that investment and investment results are very much based on you as an individual. Do not rely solely on the discussion here to inform your investment decisions. Always make the investment decisions that are right for you.