FED PUT GOES KAPUT: Powell’s Bombshell Forces Stocks to Retreat!

FED PUT GOES KAPUT: Powell’s Bombshell Forces Stocks to Retreat!

It was a quick bump and then a precipitous dump after the FOMC meeting as financial traders combed through Federal Reserve Chairman Jerome Powell’s heavy words. The official FOMC statement offered a glimmer of hope, but Powell had his “Volcker moment” and threw cold water on any near-term pause or pivot hopes.

Sure, the markets got the 75-basis-point federal funds rate hike they had expected all along. Economists have become adept at forecasting the percentage of rate hikes right before they happen, but they can’t read the tea leaves clearly enough to anticipate what’s going to come out of the Fed chairman’s mouth.

Not that anybody assumed the FOMC meeting would be all roses and tea parties. After all, the Dow Jones Industrial Average surged 14% in October and the Personal Consumption Expenditures (PCE) index, which is the Fed’s preferred inflation gauge, rose to 5.1% in September.

In other words, inflation is still too sticky and the market’s still too frothy on a multi-year basis for the central bank to back off of interest rate hikes just yet. Still, stock market investors went on a quick buying spree when they heard the word “lag” in the FOMC statement.

More specifically, the FOMC vowed to “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” So, maybe the committee will at least consider the impact of rate hikes on the U.S. economy in the future. That’s good news, right?

Not so fast because Powell still had to make his speech, and it was like Darth Vader entering the room and casting a dark shadow over the proceedings. First, the Fed chairman cautioned that it’s “premature” to talk about pausing hikes and said that “we have a ways to go.” This itself turned the major stock market indices from green to red.

Then, Powell really unleashed the Kraken when he said “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Does this mean that the “terminal” fed funds rate will be 5% or higher?

Consider not only the likely impact that this will have on stocks but how it will affect the overall economy. The federal funds rate sets the pace for interest rates on all kinds of loans from auto loans to mortgages and credit card debt.

As Powell deliberately discourages borrowing and lending, thereby crimping purchasing and spending activity, this is bound to take a toll on the American economy, and perhaps even the global economy. That’s the Fed’s “plan” to slow down the circulation of money throughout the economy and curb inflation.

What Powell really wants to see before he even considers backing off of his aggressive path of rate hikes is higher unemployment and lower stock prices. In other words, nothing less than a miniature version of Paul Volcker’s dramatic interest rate boost in the early 1980s will assuage Powell’s single-minded quest to eventually get inflation back to 2%.

It’s a long and painful road from 8.2% to 2%, and this undoubtedly isn’t what the current politicians in Congress or the White House wanted right now. Still, Pandora’s box has been opened, and nothing is holding up the markets until the next monthly inflation print and/or the December FOMC meeting.

Corporate earnings haven’t been stellar, so don’t expect any safety net there. Instead, prepare for a “normalization” of large-cap stocks back to their fair value, or at least close to it. Meanwhile, if you’ve been following my recommendations throughout the year, your holdings should be diversified enough – and you’ll already be profitable enough – to withstand any near-term drawdowns that might come.