If the media is good at anything, it’s coining and circulating buzzwords. In March of 2023, nobody’s talking about “transitory” inflation anymore; now, the phrase on every reporter’s lips is “higher for longer” as Federal Reserve Chairman Jerome Powell fans the flames of rate-hike fears.
Powell is effectively the Darth Vader of the financial markets now, as just a few words from the Fed chairman can send both stocks and bonds (prices, not yields) lower at the same time. Thus, even folks who thought they were safe with a combination of the SPY ETF (representing the S&P 500) and the TLT ETF (representing long-dated bond prices) have no place to hide from Powell’s tough talk.
Amazingly, there are seemingly intelligent people out there who believe what Powell says. Morgan Stanley economists, for instance, are worried that the Fed chairman just opened the door to 50-basis-point interest-rate hikes.
Most likely, they’re basing their fearful stance on Powell’s testimony to Congress, in which he did his best to cause panic in the financial markets. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell declared.
Naturally, the stock and bond markets bristled at this remark and prices lurched lower, though only moderately. To drive the point home, Powell added, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
This, ladies and gentlemen, is what fear and loathing in the markets looks like. Government bond prices sank and yields jumped, with the 10-year Treasury note briefly hitting its head on 4% before traders calmed down.
Even more extreme was the movement of the 2-year Treasury note yield, which rose 6 basis points and reached 4.956%, its highest rate since 2007. Gold, meanwhile, headed back toward $1,800 while silver reverted toward the $20 mark.
Bear in mind, this is the same Federal Reserve chairman that talked about “transitory” inflation in mid-2022, but then reversed his stance on inflation before the year was over. And, it’s the same Jerome Powell that raised interest rates in late 2018, but then made an abrupt U-turn and enacted rate cuts soon afterward.
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In other words, Powell is prone to change his tune at a moment’s notice. Does the media have such a short attention span that they’re now placing their full faith and credence in the Federal Reserve’s remarks?
Hopefully, you’re willing and able to separate the talk from the action, and to put more stock (literally) in the action than the words. In less than a year’s time, the Fed has gone from four consecutive 75-basis-point hikes to 50 and then 25. Remember: with an election year coming in 2024, no central banker wants to be responsible for causing a recession.
The Federal Reserve has already done what it set out to do: drain the money supply by effectively ending quantitative easing. At any sign of real trouble in the economy, the Fed can easily reintroduce billions of dollars into the system.
Besides, this isn’t Powell’s first attempt at tough talk. Exactly a month ago, Powell warned that if we get “strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in.”
Powell also cautioned at that time, “It’s probably going to be bumpy, and we think that we’re going to need to do further rate increases, as we said, and we think that we will need to hold policy at a restrictive level for a period of time.” This is basically the same type of language that he’s using now, so there really aren’t any surprises here.
Yet, like a petulant child, the markets wants what it wants right now and is prone to tantrums when it’s not immediately pacified. But then, investors were conditioned to behave that way by the Federal Reserve, which assuaged the markets and kept interest rates ultra-low since 2008-2009.
So, don’t pity the Fed for having to “thread the needle” or whatever buzz phrase the media might use next. Just stay on the lookout for blood-in-the-streets bargains, which the Crush the Street crew serves up fresh and ready on a regular basis.
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