Fed Pushes the Painful Button

“Higher for Longer” is Wall Street’s New Buzzword

Remember how the “strong consumer” was supposed to save the economy in 2023? That narrative isn’t working out too well now with high gas prices ($6 per gallon in California!) boosting inflation and shoppers reflexively closing their wallets and purses.

Consumers are tight, and investors are getting nervous. Even Federal Reserve Chairman Jerome Powell was forced to admit that a “soft landing” for the U.S. economy isn’t his baseline case. His previous talk of a soft landing was about as reliable as his 2022 prediction that inflation would be “transitory.”

Sure, the FOMC chose to pause its interest rate hikes this time, but that “pause” is probably just a “skip” since Powell specifically warned about another hike coming this year. Plus, the Fed’s dot plot indicated that the “higher for longer” interest rate policy could persist through 2026.

All of this will have deep repercussions throughout the economy, especially with the holiday season coming. Retail chains are reportedly trimming their holiday hiring. For instance, Macy’s will trim its hiring by 3,000 while Target and Home Depot have warned that their customers’ discretionary purchases are slowing in favor of necessities such as groceries.

Meanwhile, government-sponsored mortgage financier Fannie Mae practically predicted a housing market collapse without actually using those words. The company observed that total home sales “remain at levels not seen since 2011,” forecasted that total home sales would “be around 4.8 million in 2023, which would be the slowest annual pace since 2011 and 4.9 million in 2024,” and downgraded its prediction for mortgage originations from $1.60 trillion to $1.56 trillion in 2023 and from $1.92 trillion to $1.88 trillion in 2024.

Large-cap stocks, particularly this year’s high-flying “Magnificent Seven” technology stocks, are in a sea of red as these harrowing developments hit the mainstream media. At the same time, the bond market is responding by pushing yields higher and bond prices lower.

It’s hard to even list all of the problems that are all converging at once upon the fragile U.S. economy now. Folks who took out federal student loans had a reprieve for a while, but they’ll soon have to start repaying what they borrowed. Consider how this will impact consumers who are already cutting back on non-essential purchases due to high gas prices.

Moreover, there are multiple ripple effects from the Fed ramping up borrowing costs. The 30-year mortgage loan interest rate is above 7% now. Hardly anyone is willing to sell their house now (which they probably got a 3% interest rate on a few years ago) just to buy a new home with a 7% interest rate.

And have you checked your credit card interest rates lately? I hope you’re able to make your credit card payments immediately because the banks are charging “loan shark interest rates” in the words of certified financial planner Barry Glassman.

Just take a gander at what’s happened to credit card interest rates during the past couple of years. Alarmingly, one study found that 37 out of 100 credit cards currently cap their APRs at 29.99%, which is a record high.

Bankruptcy filings are up to 2008 and 2020 levels, the money supply is contracting to its lowest level on record, and the 10-year minus the 3-month Treasury yield curve has been inverted for 216 trading days, the longest period in history. How many more red flags do you need?

People ask me why I hold tangible assets in a secure storage space… To understand why I diversify my portfolio, people just need to look at the data and see what’s going on. When even the Fed chairman is publicly shelving the “soft landing” story, it’s time to add a safety net – or two, three, or more – to whatever wealth you’re holding.