Chairman Jerome Powell, in highly anticipated remarks from the annual Jackson Hole policy meeting, said in no uncertain terms that interest rates will keep rising and aren’t likely to come down soon. But that’s where the certainty ended. The size of a September rate hike hinges on the data, Powell said.
Wall Street took his remarks to imply that that 75 basis point increase is on the table. But will that be that case if the CPI data early next month points to a reading of 7.8% or below?
Future Wealth’s View
Just last week, our report was titled “Only the Fed can derail this stock market rally”. And just like that, on Friday, Fed Chair Jay Powell made some hawkish comments and took the steam out of the market.
And so, we are down to just two scenarios for the September Fed meeting. If the inflation reading (CPI) in August drops to ~7.8% or below from July reading of 8.5%, there is no compelling reason for the Fed to hike rates beyond 50 bps and if the reading is above 7.8%, the Fed will raise the rates by 75 basis points. But, the market has already priced in a 75 basis point raise from the Friday sell off. One could conclude that there is only upside from here.
The unfortunate news for those of us who would like to see inflation come down faster is that the Biden administration appears to be working against the Fed. The loan forgiveness program may go some ways in getting Biden re-elected but puts a lot of free money in consumers’ pockets that results in, you guessed it, higher inflation.
And so, we have a situation where unemployment remains low, consumer spending remains robust, the Fed wants the economy to slow down, Wall Street does not want a recession and Biden wants to do everything to get the Democrats to hold on to the House and the Senate.
This reminds us of a game theory concept called Pascal’s wager, in which Pascal proposed that given the choice between believing in God and not, believing is always a better option. While we won’t get into the details of the theory in this report (you can see the full description of the Pascal’s Wager below), the current conundrum the Fed faces, the best course of action would be to stay invested in the market. You can come to your own conclusion.
Pascal’s Wager – For those who are unfamiliar with the decision, it goes something like this. First off, the following crucial components must be understood. While there is no one that is able to prove either side of the argument (that God does or does not exist) for sure, only one of these options can be true while the other is false: God either exists or does not exist. Therefore, it stands to reason that everyone must make a decision regarding this – in other words – the wager is not optional. Everyone must make a definite explicit choice to believe in God or not. Now that the background of Pascal’s logic in his wager has been explored, let’s delve into the game theory aspect of his decision. Pascal determined that if you wager that there is a God, and you are correct, then you gain an infinite amount of benefit. This benefit can be from being able to live an eternal afterlife in heaven, or from being rewarded for believing in God one’s whole life. He also reasoned that if one was to believe in God, and God was to not exist, then there is nothing to lose out on. The conclusion, as Pascal saw it, came from realizing that while what you risk is finite (living life believing in a false God), what you stand to gain is infinite, spending an eternity after death with that God in heaven. If you do not believe in God and you are incorrect (God exists), then you stand to suffer an infinite amount of loss (hell or punishment). Additionally, if you choose to disbelieve and you are correct, there is nothing to gain from this, as there is no afterlife waiting for atheists to be proven correct.