If you follow the mainstream media, you likely saw the headlines last week…
“Traders Raise Chances for a Lower Fed Rate Hike in December”
– CNBC
“The Federal Reserve Pivot Is Coming in December”
– Investor’s Business Daily
“Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes”
– The Wall Street Journal
The WSJ piece made the biggest splash.
It said some Fed officials are “growing uneasy with big rate hikes.” And that they’re starting to worry about the risks of being too hawkish.
The Fed’s potential pivot is on many people’s minds right now. But if you’ve been reading Inside Wall Street, you already saw it coming.
So today, I’m going to look beyond the headlines – and show you what you can do about it.
Three Stages of the Fed’s Pivot
For months I’ve been saying the Fed will have to dial back its hawkish stance before the year is out.
And in a video update I sent you on August 29, I laid out the three stages for that pivot. Here’s how I put it:
The markets in general are going to continue to struggle to figure out whether the Fed is incompetent, dangerous, or both…
But I still firmly believe the Fed will have to pivot… It’s going to go through three stages of that pivot.
The first is going to be a reduction in the size of rate hikes.
The second will be a pause in rate hikes.
And the third will be rate cuts, when it becomes blatantly obvious that the Fed is killing the economy.
How long will it take to get through those three stages?
That depends on a lot of factors. But I think the process will be a lot more condensed than it was in the past.
After the 2008 financial crisis, interest rates remained at almost zero for about seven years.
Then starting in 2015, the Fed gradually hiked rates over the next four years. In total, it raised rates by 2.25% before it eventually flipped.
But the Fed is facing so many pressures that didn’t exist back then.
From an energy crisis that could soon affect every person in America… to war in Europe, which has impacted supply chains and prices for necessary goods here at home, like food and gas.
The Fed can’t stay hawkish for too long this time around. And with the Fed’s fund rate already higher than it’s been in more than a decade, the central bank is running out of room to maneuver.
Then there’s that thing called debt.
At writing, U.S. federal debt stands at a record high of $31 trillion. It costs about $680 billion to maintain the debt. That’s roughly 13% of the total federal spending. And it’s about $57 billion a month.
If the Fed keeps raising rates, the interest payments alone could all but bankrupt the government.
The Fed’s Unofficial Mandate
Higher rates also hurt consumers and businesses. And that’s not good for the market, either.
Remember, the Fed has an official dual mandate. The first part of its mandate is to maintain price stability (fight inflation). The second is to attain full employment.
But as longtime readers know, I believe it also has a third – unofficial – mandate. And that is to protect the markets.
The S&P 500 has already dropped as much as 20% year to date.
On the surface, it might not seem like the Fed cares much about the markets’ reactions lately. But it does.
The news stories I referenced earlier are a case in point. And last week, I got on the phone with one of my contacts in the media.
Rumor has it that, for its past two meetings, the Fed has been alerting the WSJ and The New York Times two weeks in advance of its rate moves.
To me, this is a manifestation of the Fed signaling the initial stages of its pivot to the media. And, by extension, to the big banks and the market.
And as I wrote to you earlier this week, we already have a precedent for this from across the Atlantic. Last month, the Bank of England (BoE) became the first major central bank to pivot to “restore market functioning.”
Right now, the Fed may have more wiggle room than the Bank of England. But it will have to face the music eventually.
What This Means for Your Money
We can’t know exactly what the Fed will do at its last two meetings this year. We’re probably also still a long way from the Fed slashing rates.
But the softer language from Fed officials is a small step in the right direction. And now, others are starting to catch on.
After the Wall Street Journal report came out, traders adjusted their expectations for Fed actions. Here’s what CNBC said about this last week:
While a 75 basis point rate hike is still highly expected at the November Fed meeting, traders increased the chances that the December meeting would see just a 50 basis point move.
As for my view, it hasn’t changed. I still believe the Fed will start pivoting this winter.
That means the market may breathe a sigh of relief. And it may begin a path toward higher prices – especially for some of the hardest-hit sectors that rely on cheap money.
That includes the Transformative Technology and New Money profit sectors we follow for you here at Rogue Economics.
So, what does this mean for you?
For one, this is still a great time to “buy the dip.” If history is any guide, short-term pain in the market is only a loss for those who stop investing entirely.
But for anyone who buys in through the highs and the lows, it’s another opportunity to make a lot more money by staying consistent.
That said, there’s still going to be a lot of chop. And with so many dips to choose from in this market, you need to be careful about managing risk.
So, don’t invest all your capital on a single name or idea. And invest in small increments, rather than all at one time.
For instance, consider investing half of what you’d allocate to that name now, and half in a few months, or when you see a dip. You can also consider investing smaller amounts over a longer period of time.
This is what we call “legging in,” or “dollar-cost averaging.”
This will allow you to spread your risk – even when you’re investing in what seems like an amazing opportunity.
This sort of approach can help you protect your nest egg if one of your investments doesn’t work out. Which is still possible in these Fed-driven markets.
Regards,
 |
Nomi Prins
Editor, Inside Wall Street with Nomi Prins