Yesterday, we looked under the hood of the latest inflation figures. And it wasn’t a pretty sight.
Costs continue to rise in nearly all categories reported in the latest Consumer Price Index (CPI) figures.
Some categories, including food, gasoline, and rent, are seeing their highest annual increases since the 1980s.
[If you missed that dispatch, you can catch up here.]
Meanwhile, the Fed continues to wield its interest rate baton to fight what, so far, has been a losing battle against rising inflation.
In three rate hikes this year, it has raised the Federal Funds Rate by 1.5%. It now stands at 1.75%.
The Fed’s actions are still working through the system…
And President Biden has reassured the Fed that he will give it room to fight inflation.
But Americans are wondering when the inflation peak will come – or if we are even close to the peak.
So today, I’ll show you the choices open to the Fed right now… and which course of action I believe it is most likely to take…
And I’m sure you’d like to make up for some of the higher prices you’re paying at the gas station and the supermarket…
So I’ll also show you some ways you can play the current market volatility that’s caused by all the uncertainty around the Fed’s next steps to your advantage…
Positive Signs on the Horizon
So, what’s the Fed going to do next?
Well, the biggest risk to our economy right now is that it will overreact and overtighten. It might want to prove some sort of political point about its competence to fight inflation.
But the Fed can’t control inflation on the supply and demand side. It can’t produce oil or food. It also can’t reduce the cost of rent or of a used car.
That’s why, with respect to the Fed’s role in fighting inflation, I believe that one of two things will have to happen.
Either the Fed will have to raise its inflation target from its current 2% base…
Or it will have to come to a point where there’s enough give in certain prices for it to declare victory over inflation.
That could happen, of course. Inflation is broad-based and there are many parts to it.
And there are some positive signs on the horizon…
Oil prices fell for almost four weeks straight from mid-June to mid-July. And gas prices have declined for the past 28 days in a row.
Commodity prices have been falling since the previous CPI figures came out a month ago.
In addition, wage growth has been slowing down over the past few months.
Indeed, inflation-adjusted average hourly earnings fell by 3.6% this month. That’s the most in the history of the CPI index.
So we could see a lower total inflation number in the months to come.
That might be enough for the Fed to take its foot off the gas…
Also, don’t forget, the Fed has a dual mandate. It needs to maintain full employment as well as price stability.
We currently have 3.6% unemployment.
The Fed might slow down or stop raising rates – or send out signals to that effect – if unemployment hits 4%.
The Fed’s Dilemma
But even if the Fed fights tough, reducing inflation isn’t about one government’s policies in isolation.
Central banks around the world are battling inflation that they can’t control. It’s like a geopolitical bravado game of “Who’s the most serious inflation-fighter?”
As Bank of Canada Governor Tiff Macklem said after raising rates by 1% last week, “We had indicated we were prepared to be more forceful. Today was more forceful.”
That was the Bank of Canada’s biggest move in 24 years. The markets were expecting a 0.75% hike. Canada is the first G7 country to enact such an extreme hike during this Distortion period.
The central bank of South Korea recently raised rates by 0.5% (the most in one go since 1999).
The European Central Bank (ECB) is expected to announce its first interest-rate hike since 2011 this week. Markets are expecting a 0.25%-0.5% increase.
The question now is: Does the Fed want to win the rate-hiking competition? Or would it rather maintain stability in the markets and the economy?
The Fed’s Next Move
So what is the Fed’s likely course of action?
As I told you yesterday, some are expecting a 1% interest rate hike.
I believe 1% would be too much of a shock to the markets and the real economy right now – even for the currently hawkish Fed.
But I also believe the latest CPI data ensures that a mere half-percentage-point hike is now firmly off the table.
So the most likely outcome is that the Fed will raise rates by 0.75% at its meeting next week .
Regardless which comes to pass, one thing is certain: Volatility will be around until the Fed steps back from these chunky rate hikes.
And economic uncertainty will rise as consumer confidence falls.
What This Means for Your Money
Now, I promised to give you my playbook for how to play this current period of volatility to your advantage.
Firstly, hold onto your positions until the Fed takes its foot off the rate-hiking gas.
And yes, this includes through the losses you’re seeing in your portfolio, as difficult as that may be. Selling into market volatility is never a good idea.
Second, you could use this period of volatility in the markets to buy the dips in your core holdings in small increments.
Third, consider purchasing an exchange-traded fund (ETF) of companies that are dedicated to paying high dividends to their shareholders.
My recommendation for this is the SPDR Portfolio S&P 500 High Dividend ETF (SPYD). It pays the average dividend of the top 80 highest dividend-paying companies in the S&P 500 Index.
Alternatively, I recommend buying companies with high dividends that fit one of my five Distortion Themes. These are New Energy, Infrastructure, Transformative Technology, Meta-Reality, and New Money.
I believe money will eventually flow into these areas once the Fed pivots back to a neutral position on rates and monetary policy.
Until tomorrow,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. Regardless of which course of action the Fed takes next, there’s a $40 trillion transfer of wealth about to happen… one that could forever split the entire nation into two groups – the “new rich” and “the new poor.”
Experts estimate we could see 263 million people fall into poverty in the coming months ahead. And some Americans could find themselves living in a “Permanent Recession.”
I want to do everything in my power to help you end up on the right side of this new moment in history. That’s why I just released a new video presentation. I’m even giving away the name and ticker symbol of an investment folks have used to join the “new rich.” Click here for all the details.