The markets have been especially volatile this week as buying was met almost immediately with selling and selling with buying, leaving the sellers with a slight edge. All on the back of the Feds strategy to bring inflation down. Yesterday the Fed Board voted to raise rates an additional .75% taking the rate to 3.25%, a level not seen since 2008 and the third time applied this year. This by itself is a clear message, raising interest rates impacts the economy in a variety of ways, from mortgage rates, auto rates all the way to credit cards. But, this is all happening at the same time employment appears stable and the consumer is still consuming unfazed. So, what is the intent of the strategy and why do I think it’s obvious?
Because of Fed is raising rates, the treasury bond market is forecasting where rates may go. This created a dilemma for the stock market that, in my opinion, is exactly what the Fed is comfortable with. The reason is dilute the amount of capital in the systems, and you dilute the amount of capital to consume with. In the meantime, the increase in interest rates are being sold as the coming preferred investment opportunity. I agree, but when bond yields have reached their high, they will rally, but stocks will too and that’s why we stay invested.
Housing is having a bad year, sales of existing homes are declining, and new homes are on hold. The former because of rising interest rates and the latter because of rising commodity prices. Employment has been steady, unemployment claims are steady, unemployment as a percentage of participating workers went up a little in August, not enough for the Fed to be happy. However, since last month the number of firms that have mentioned cutting back on hiring and in many cases initiating layoffs of some exiting employees, as part of their recent earnings guidance. Should employment data show further deterioration in the workplace, declines in wages and hours worked, the outcome is once again the aim of the Fed who are aware that workers in peril spend less, leaving inflation in a lonely place. None of the economic conditions mentioned were in yesterday’s talking points of Fed Chairman Powell, who reiterated the goal to bring inflation down, but forgot to mention the obvious intent to bring the economy down with it.
Many of the comments that have come from the corporate community have come in two parts, the first is the present concerns of the economy and challenges to the balance sheets from inflation and the second, the future looks bright. Good news for the Fed, but good news for the markets as well, that is if the markets stop going down long enough to pay attention. Washington is still hunting for further mischief with little regard to mentioning anything about inflation nor the economy, unless it can be positively spun. Worth noting, at the outcome of the upcoming elections, if even one house is lost to an opposing party, the result would be gridlock, and the markets love gridlock.
Solutions are boring, problems can always be exploited, that’s why some problems never go away. It seems obvious that the Fed has one goal, deplete discretionary and corporate capital and inflation has nowhere to go but down. When that even begins to happen, the markets will react favorably. In the meantime, as always, be patient and, in my opinion, it will happen.