We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes. It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.
As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation. Instead, we now anticipate that some additional policy firming may be appropriate.
That’s Federal Reserve Chair Jerome Powell at the Federal Open Markets Committee (FOMC) meeting last week.
As expected, the Fed raised its target rate another 0.25%. It’s now between 4.75 and 5%.
That said, the Fed did remove its existing guidance that “ongoing rate increases” will be appropriate. Many analysts in the financial echo chamber took this to mean that the “Fed pivot” is coming.
If we remember, the Fed pivot refers to the idea that the Fed will have to end its rate-hiking campaign and get back to pouring cheap money into the system.
I don’t think that’s the case.
To the contrary, I believe the Fed is committed to “normalizing” interest rates. There’s no other choice if they want to avoid destroying the economy and the entire monetary system.
Nothing said in last week’s meeting has changed my mind on that.
Unlike his predecessors, Powell appears to be a straight shooter. Remember, he’s not a career academic like Ben Bernanke and Janet Yellen were.
Powell is a Wall Street veteran. And he made an absolute fortune on Wall Street. His net worth is north of $100 million.
So unlike Bernanke and Yellen, Powell doesn’t need to walk the party line or cover for hidden globalist agendas. We talked about that earlier this month.
With that in mind, let’s look at what Powell said last week in response to a question about what exactly “policy firming” means. The journalist basically asked whether “firming” meant no more rate hikes.
In response, Powell suggested focusing on the words “may and some, opposed to ongoing”.
Reading between the lines here, Powell made it entirely clear that no pivot is coming.
If we see a strong credit contraction due to the liquidity crunch in the banking sector, the Fed may hold off on the next rate hike for a quarter or two. But that’s it.
The Fed is still committed to getting back to what they refer to as a “terminal” rate. This is the rate at which the Fed sees as neutral. That is to say, it’s not stimulative nor is it restrictive to the economy.
We don’t know what the Fed thinks the terminal rate is. But it’s almost certainly between 5% and 7%. And that means more rate hikes are coming.
To me, that’s a good thing. We need “normal” interest rates to get back to any semblance of fiscal sanity.
That said, this also means that the Age of Paper Wealth is over. The days of the Fed juicing the stock market with low rates and cheap money are behind us.
The bad news here is the investments that worked incredibly well during the bull run from 2009 through January 2022 will not work so well going forward.
The good news is that there are plenty of solutions.
And it all starts with fundamental asset allocation. More on that right here.
-Joe Withrow