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Another Big Fed Rate Hike

As “expected” the Federal Reserve raised the fed funds rate by another 75 basis points (.75%) today.  We put “expected” in quotation marks because when we started writing about inflation ten months ago, the big Wall Street firms thought we’d get a total of 75 basis points of rate hikes for all of 2022.  We vehemently disagreed which is why we’ve been short market indexes all year and owned oil (as well as other inflation hedges like gold).

Today’s rate hike was the third 75bp increase in a row and brings the fed funds rate to 3.00% – 3.25%.  Fed Chairman, Jerome Powell, indicated the current plan was to hike another 1.25% this year and another 25bp next year.  If he sticks to his guidance, what we’d expect to see is another 75bp increase at the next Fed meeting and 50bp in the final meeting of 2022.  That would bring the expected year-end rate to 4.25% – 4.50% with another .25% increase coming in early 2023.

We note that the current real interest rate (fed funds rate less inflation) is negative, and the Fed balance sheet remains very close to its prior $9 Trillion level.  For those who think Powell is excessively hawkish (finance slang for someone who wants higher rates and a tighter money supply), we think the evidence from the prior sentence is enough to address that concern.

The market is having difficulty figuring out what to do with Powell’s indication that the fed is targeting rate hikes into the mid 4% range and that as of now, there are no targeted decreases in interest rates until 2024.  The market was up before the 2pm announcement, quickly swung negative, reversed and went up above the 2pm levels, and as of this writing has gone even more negative.  There were many market participants who were hoping for lower rates much sooner.

We point out that any projections made by the Fed are based on the data they’re seeing right now which changes frequently.  The Fed has regularly changed its plans and projections this year.  Another less polite way to say that is to note that they’ve been late and slow (read: wrong) in reacting to inflation, and prior projections were incorrect to the point of being useless.

Deep Knowledge Investing just wrote a detailed guide to understanding the components of inflation for subscribers and that’s the best resource we can suggest right now for understanding the current environment.  We’ll continue to monitor inflation, changes in interest rates, and future quantitative tightening, and keep you updated.

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI , affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

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