Market Strategist Fed Preview: 'We Doubt Anyone Believes Them'

The Situation

For the last couple of years, we have repeatedly said that the Fed’s policy for raising rates was because credit and equity markets have been strong, rather than any real data dependency on inflation.

The idea was to limit excesses by raising the hurdle rate and stopping the free money monetary policy that had been raging, while giving the Fed some room to cut, if and when the next recession came.

The Fed also seemed sure that fiscal stimulus coming from the tax plan would add an extra jolt to the economy. Their unshakeable belief that with low unemployment and low taxes inflation just had to come, caused them to operate with blinders regarding the global economy and interest rate sensitive asset classes.

The final straw for credit and equity markets came in October when Chairman Powell – in the middle of a trade war and housing slump – arrogantly proclaimed that we were nowhere near a neutral rate.

The Takeaway

Obviously, no one really knows exactly what a neutral rate is, but we think it’s safe to say markets are telling us we’ve passed it.

The market is now left with the two most important entities in its life blaming each other for the issues they are both helping to cause: Trump is mad at the Fed for raising rates while he fights a trade war and the Fed is mad at Trump for fighting a trade war while it raises rates. So who’s on first now?

Now that oil and many software stocks have nearly been cut in half in the 4th quarter, the Fed has absolutely nothing but lagging indicators to give them any data to raise. It’s our view that despite all of this, Fed members will once again decide to squeeze one more rate hike out at the December meeting, while attempting to use the most dovish writing possible to purvey a sense of calmness to markets that they have everything under control. Unfortunately, we doubt anyone believes them.

Heading into 2019, we feel the Fed will finally take a pause to digest what their hikes have done to the underlying economy and the outcome of trade negotiations. Our only worry is by that time, it could be too late.

Disclosures

Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.