We’ve spent the better part of the last few weeks hearing from the “pivot” people. These are the market participants who have been advocating for, hoping and praying for, and betting on a Federal Reserve pivot. An astute reader recently pointed out that the definition of the Fed pivot has shifted from reducing interest rates to a slow down in the rate of rate increases. This has been going on for months, and we’ve been saying all along that of course the Fed will eventually pivot, but it’s not coming this month.
Yesterday, the Federal Reserve announced in a press release that it was raising the Fed Funds rate by .75%, and would consider economic factors in evaluating the pace of future change. The pivot people instantly declared victory and the market went from solidly down to solidly up. Here’s the problem with that analysis: The Fed was ALWAYS going to consider economic conditions in evaluating changes in interest rate policy. Who ever thought they wouldn’t?
Fed Chairman, Jerome Powell, spoke at 2:30 and clarified. He made it completely clear that the Fed wasn’t done raising rates, that he was prepared to hurt the economy to get inflation under control, that he was less concerned about the pain caused by too-high rates than by too-low rates, and that they now planned to raise rates higher than they had thought in September. The NASDAQ index fell by over 4% between Powell taking the stage and the end of the day.
Copying from our monthly letter which will be sent out soon: DKI has been positioned all year for higher-than-expected inflation leading to higher-than-expected rate hikes leading to larger-than-expected market declines. At this point, we’re not sure why investors continue to read “analysis” from large sell side firms who have been consistently wrong.