The Fed, which has long held the position that consumers would have to endure significant pain in order to control inflation flipped a switch on Wednesday citing that measurable progress has been made on disinflation to warrant a dovish stance on interest rates for the first time since early 2022. Fed Chair Jerome Powell expressed optimism that policymakers can pull off a soft landing, avoiding a downturn by quelling price rises without pushing millions out of work. The markets celebrated but that was soon squelched by the Jobs report on Friday. Hiring surged in January and the jobless rate fell to a landmark 53-year low, potentially raising the possibility that more interest-rate hikes are needed to finish off inflation.
The markets are now confused as to the direction the Fed will take in the next meeting which means more volatility and uncertainty will prevail in February.
Future Wealth’s View
The market’s big comeback in January was based on calling the Fed’s bluff that they will keep raising interest rates. In a surprising turn of events, Fed Chair Jay Powell didn’t try to push back against market expectations and instead reiterated the progress made toward disinflation several times in his speech this week. The market took those comments to believe that the Fed will indeed slow and stop its interest rate hikes soon.
But, of course, the Fed’s primary objective is not to make people wealthier but is instead to provide price stability and control inflation. With the strong jobs report and rising wages, inflation becomes harder to control and the one tool that the Fed relies on to control inflation is to raise interest rates. The Fed is ultimately going to come to the realization that the Goldilocks scenario of keeping unemployment low while lowering inflation goes against the very basic principle of economics – the Phillips curve.
Given that backdrop, the best investments for near term are also the most obvious ones – TIPS, treasuries and brokered CD’s yielding north of 5%. Our advice would be to lock into these rates and sit back while the market whipsaws attempting to predict the Fed’s next move in March.