The Beginning Of The End…Not Really, Though
In a monumental day in somewhat recent history, the Fed is set to enact their first rate hike since 2018. In an absolute tumultuous start to 2022; with equities markets & crypto hemorrhaging, the housing market losing a ton of momentum, astronomical CPI prints, and household debt reaching absurd levels, the American economic machine finds itself in a somewhat precarious position.
The outlook we’re presented with is ostensibly less than ideal. We are facing virtually every economic headwind in existence, the Russia/Ukraine situation is in full effect, and oil prices continue to present numerous macro problems. All of this taking place while the FOMC is set to initiate interest rate hikes for the first time since 2018.
Although, the macro picture may not be terribly bleak. While it’s obvious that the economy will struggle more so in a higher rate environment, there’s a good chance that the effects won’t be as painful as many are thinking. The Fed is struggling to find a balance in curbing record-high inflation, while also attempting to retain peace and serenity within the markets (easier said than done). The last time the inflation rate was this high, the Federal Funds Rate was at 15%. It currently stands at zero. The good thing is, is that we’re currently in a relatively strong labor market, which bodes well for the future macro outlook.
The “hyper-financialization” that we’ve seen over the past two years with massive Federal Reserve balance sheet expansion has created an ostensible asset class bubble, and has facilitated absurd fiscal spending. The Fed simply cannot fight inflation with more than incremental 25bps rate hikes because the markets, along with the integrity of the economy simply wouldn’t be able to handle it. WE’RE GOING TO FIGHT INFLATION (which was transitory not that long ago)…with a target 2.5% Fed Funds Rate…
While the minute rate hikes that many are projecting from the Fed this year likely won’t fight the larger inflation problem we’re currently facing, it’s also not likely to put a major dent in the markets and greater U.S. economic integrity (as a matter of fact, the S&P is up 1.3% at the time of this post). Some can argue that the Fed Funds Rate target has already been priced into the market, which have seen over 10% drawdowns from the early January highs. As the larger macro picture continues to develop in tandem with central banks policy modifications, the markets will price themselves accordingly.
And to end this post, I would just like to give a personal thank you to Jerome Powell, who singlehandedly created the most epic bull run in the history of the world. The QE liquidity hype train was fun while it lasted. Hope to see you again.