This piece was originally published on August 16th, 2023.
Earlier this week, we got retail sales data indicating the US consumer continues to spend without pause. Today, we got to see the minutes from the most recent Federal Reserve meeting where they wrote:
“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
Many people have complained and warned that the Fed is raising rates into a recession. They may be correct, and it won’t matter. DKI has two pieces of advice for the situation:
- It’s important to understand the personal motivations of the players involved. I believe Jerome Powell isn’t worried about putting the US economy into a recession. I also believe that he’s terrified of being the next Arthur Burns, the Fed Chairman who presided over more than a decade of huge inflation in the 60s and 70s. Powell wants to be the next Paul Volker, the Fed Chair who followed Burns and “cured” inflation by hiking interest rates almost to 20%. Given the level of US debt now, 20 % interest rates are not going to be possible, but in any situation where there’s a trade-off between a weaker economy and attacking inflation, we would expect Powell to prioritize the latter.
- There’s no point in being happy or unhappy with the Fed’s actions. Any coming disaster was baked in with a decade and a half of near-zero interest rates and trillions of dollars of quantitative easing and money printing. The best course of action is to design a portfolio that’s hedged against inflation and higher rates. That’s exactly what we’re helping DKI subscribers do now.
At this point, you all know the line:
GB@DeepKnowledgeInvesting.com if you have any questions.
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