Market plays chicken with the Fed

Investment Analysis Clubs Macro Economic Trends and Risks
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It’s generally recognized that Nick Timiraos is an unofficial “mouthpiece” for the Fed.

The Markets Are Locked in a Game of Chicken With the Fed

Investors are betting the Fed will cut interest rates as early as the second half of the year. The central bank says otherwise.

By Akane Otani and Nick Timiraos, The Wall Street Journal, Jan. 12, 2023

The Federal Reserve says it is too early to think about cutting interest rates this year. Investors are growing more convinced that is exactly what the central bank is going to do…

Many money managers predict inflation has peaked, and that price pressures will fall so fast that the Fed takes back some of its interest-rate increases by the end of the year, as it did in 2019 just seven months after its last hike.

Fed officials have been hammering a different message: This time will be different because inflation is much higher…Fed officials are nervous that the labor market’s strength could sustain wage growth that keeps inflation, as measured by a separate gauge, above their 2% target. … [end quote]

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The market is like a bunch of kids yelling, “Are we there yet?”

They are fundamentally not listening to Fed Chair Jerome Powell.

The markets react day-by-day, sometimes minute-by-minute.

Powell is laser focused on inflation. He harks back to the 1970s when Fed Chair Alan Burns reacted to political and market pressure and reduced the fed funds rate whenever inflation seemed to be coming under control. Then inflation got out of control again, forcing prices higher and higher. It wasn’t until Fed Chair Volcker raised the fed funds rate to almost 20% that inflation was finally conquered. And he had to do it twice.

When Powell said that he would keep the fed funds rate restrictive for an “extended” period he meant extended…several or many months. And the rate is still under the inflation rate so it isn’t restrictive. It’s approaching neutral.

The Fed is trying to accomplish a soft landing for the economy. But, in 2021, they were trying to accomplish a slight increase in inflation.

Wendy

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I just increased my already overweight cash position slightly by selling off some small stock holdings as a hedge against the possibility that the Fed will stick to its guns. Two conflicting principles- ‘ you can’t time the market’ vs ‘don’t fight the Fed’. I don’t fight the Fed.

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Based on prior experience, I would not bet against the Fed. They are warning us of what thier intentions are - why doubt them now?

Jeff

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The safest bet for me is to take the Fed at its word. But the lowest unemployment rate since 1969 plus a large COVID wave in China could add up to a choice between a hard landing (deep recession) and accepting 3 percent inflation. Soft landing may not be an option. Interesting times.

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A rate cut is a safe bet. The US & the world are projected to enter a recession in 2023. And Americans are nearing to being tapped out on credit. US banks are setting aside assets for the coming loan defaults.

The share of credit card users who carry a balance has increased to 46% from 39% a year ago, according to Bankrate.

“Almost half of card holders are carrying debt from month to month,” Rossman says. “And that debt is as expensive as ever.”

The biggest US bank, JPMorgan Chase, set aside $1.4 billion in fresh reserves in case of loan defaults, noting that its “central” scenario is “a mild recession” with somewhat higher unemployment.

Bank of America accounted for $403 million in possible bad loans as Chief Executive Brian Moynihan alluded to an “increasingly slowing economic environment,” while Citigroup reserved $640 million and Wells Fargo $397 million for similar purposes.

The World Bank slashed its 2023 global economy growth outlook to 1.7% for 2023 from its earlier projection of 3%.
It would mark “the third weakest pace of growth in nearly three decades

The adjustment was led by a significant downgrade to its prospects for the U.S. economy — it now forecasts 0.5% growth from an earlier projection of 2.4%.

The World Bank cut its growth outlook for China for 2023 from 5.2% to 4.3%, Japan from 1.3% to 1% , and Europe and Central Asia from 1.5% to 0.1%.

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So, as a person who cares less about “the economy” and more about “the stock market” what does this portend for “the stock market”?

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If the Fed does what it has repeatedly said it would do, there will be a recession, the stock market will drop and the Fed will hang tight.

If the Fed does what the market is betting on – cut rates as soon as the economy slows – the stock market will rise. But the Fed is aware of this and already said they won’t do it.
Wendy

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From 1981 to 2020…and then during the pandemic…the FED bailed the markets out endlessly.

That is gone. No debate no suggestions from the peanuts gallery to think things over…it is over with…

That is why in 1948 and now in 2023…the market will flat line and not create a V recovery. The FED is off duty. Either the industrialists sink or swim. And every news flash matters to your equity and bond market investments. The bond market has always been more volatile than the equity markets.

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I agree with Wendy on this one (too).

At most, we can hope for a smaller raise - maybe ¼ point instead of a ½ or ¾ point hike. This might temper the market a little and either mitigate or forestall a severe recession. I don’t see the Fed not raising the rate at all, though.

Pete

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Next fed meeting is Feb 1. They will probably raise rates by 1/4. So far, there is no recession, in fact the economy did a lot better in Q3/Q4 of 2022 than it did in Q1/Q2 of 2022, and there are no clear signs of deceleration in Q1 of 2023, plus with the easing of many supply chain constraints, Q1 might even be a little better than otherwise expected…

The markets will probably celebrate the 1/4 increase, at least for a short time, because it marks a major slowing of increasing rates (3/4 to 1/2 to 1/4). Likewise, the first fed meeting with no change to rates will also be celebrated because it marks the first step towards a pivot.

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The economy is excellent. There is no recession for a while to come. There might be a little recession later in the year. Nothing much if 1948 is our guide.

I have headhunters after me. I have more work than I can handle. I am not going to market my art on Etsy. The scuttlebutt three years go among artists was Etsy was overdone. I am getting nothing worthwhile in my stats after after a few weeks.

I am starting to study C# for my video game development. I am relieved and happy to be finally moving in this direction.