Stocks surged and U.S. Treasury yields fell Friday after Federal Reserve Bank of San Francisco President Mary Daly said future interest rate increases could come in smaller increments to achieve the Fed’s target neutral rate. While the Fed seems set to again lift its benchmark rate by 75 basis points at the November policy meeting, there may be some debate among Fed officials over whether to slow down aggressive rate hikes thereafter.
The solution to the interest rate puzzle is whether the Fed will look at “hard” or “soft” data. Hard data is the CPI and the PCE. The PCE (Personal Consumption Expenditures) Price Index is the Federal Reserve’s preferred gauge of inflation, as it more accurately reflects consumers’ spending habits than the Consumer Price Index (CPI). Soft data is reports of layoffs from companies, lower consumer spending and weak guidance for next quarter from US corporations.
We all know by now that inflation is sticky and will stay high for some time to come. If the Fed sticks to its guns to follow the “hard” data before it pauses interest rate hikes, there may be a whole lot of pain in the financial markets in the months to come.
Future Wealth’s View
We had stated in previous reports wishing for the days of Alan Greenspan when Fed comments were few and far in between. These days the members of the Fed are talking too much with the press and expressing conflicting opinions. In ordinary times, it would not matter but in these times, when the Fed is basically controlling the stock market, every word counts.
In addition to the comment by Mary Daly, here is a sampling of comments from other members of the Fed in the past week – Cleveland Fed President Loretta Mister signaled a 75 bps increase in November and December, Fed Vice Chair Lael Brainard expressed unease with a 75 bps beyond November, Philadelphia Fed President Patrick Harker announced that he expects interest rates to be well above 4% by year end. Chicago Fed President Charles Evans and Kansas City Fed President Esther George also made similarly conflicting remarks.
Having been bombarded by conflicting comments from the Fed every day, we would echo Biden’s comment to Donald Trump in their presidential debate emphatically stating – “Will you just shut up?”. In Wall Street, every company institutes a quiet period before their earnings release, preventing CEOs and CFOs from speaking to analysts and fund managers before the release of their quarterly results. We believe it is time to institute a similar quiet period for the Fed before their monthly meetings.
We, at Future Wealth LLC, believe that the Fed, having lost all credibility and stating several times that they will be data dependent, is not going to pause interest rate hikes until “hard” data shows that inflation has come down to 2%. Which means it is a long road from current levels. We view the recent rally as a reflection of the optimism in investors and unfortunately, they are going to be burnt once again. Stay safe.