Thanks Powell - Fed hints at even more rate hikes

The Federal Reserve on Wednesday announced a .75 interest rate hike which was exactly what most analyst expected. More important than the rate hike itself was any hints as to the direction the Fed might take in the future as far as interest rates were concerned. Would they soften their stand or become even more hawkish? The markets awaited the committee's signals with great anticipation. 

The statement released hinted that the worst might be over and we could be near the end of the hikes. Initially the markets responded quite favorably with a nice little bounce after reading potentially good news. 

"In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

 - FOMC Statement on November 2, 2022

Given that the Fed would be looking at the "cumulative tightening of monetary policy" we could assume they would be taken into consideration all the previous hikes and watching to see what sort of effect that would have on the economy before taking further action. There is, as they pointed out, a lag between interest rate hikes and the effects they create. That sounds like good news...

NOT SO FAST

Fed Chairman Jerome Powell, as he often does, quickly threw a wet rag on things with his speech that soon followed.

It is very premature to be thinking about pausing.

- Jerome Powell

Well that wasn't very nice. Get all of our hopes up and dash them as being "premature" after all. The markets quickly turned negative, first stocks and then crypto. Thanks once again Mr. Powell, also known as the "portfolio killer", Ok so I made that up but you get the point. Powell speaks and your investments tank. We have seen that play out time after time. But he wasn't done...

If we were to over tighten, we could then use our tools strongly to support the economy. Whereas, if we don't get inflation under control...now we're in a situation where inflation is now entrenched and the employment costs, in particular, will be much higher potentially.

 - Jerome Powell

So let's just potentially over correct and send the markets into a tailspin. If we mess that up we can always try to fix that later. Let's forget how the Federal Reserve's policies have helped create this mess in the first place. It baffles me how the Fed refuses to raise rates when the economy is humming along and can easily absorb higher interest rates with minimal impact on investments. Instead, they keep interest rates artificially low for too long and when they need to raise them to fight off the inflation caused by all the money printing they risk inflation because the economy isn't as  strong at the time. Basically, the Fed has left itself in a catch-22 as it needs to pick its poison now - inflation or recession/depression.

Most will interpret these conflicting statements from Powell versus the FOMC Statement to mean that they will continue to raise rates, but at a slower pace. This means either more time between raising rates or raising them at lower levels, with the later the most likely outcome. But honestly, that isn't what the Fed Chair said so maybe we are actually putting words in his mouth. Would another 75-basis rate hike surprise me next month? Not at all, especially if jobs remain strong and the inflation numbers don't shrink. Powell is a hawk!

The Fed's move raised the key short-term rate to a range of 3.75-4.0%, this is the highest level in 15 years. Can you think of a worst time in the last 15 years to interest rates higher. Not if you have a variable mortgage or are planning on buying a house. Not if you rent. Not if you are already struggling to fill up your tank and buy groceries.

The bottom line is that this continuation of raising rates will certainly hurt the economy at a time when it is already fragile. This isn't just true in the United States, but around the world. It is those outside America that will actually feel the pain the worst thanks to policy failures of the past. With supply chain issues, rampant inflation, and global conflicts centered primarily around Ukraine and the tensions caused by North Korea, we could be in for a bumpy ride for some time to come. As if the past 12 months weren't bad enough.

It is time for some change in the Federal Reserve. It is time to be proactive, instead of always being reactive. Mid term elections take place less than a week away in the US, unfortunately Powell's position is appointed but perhaps we can do something about those doing the appointing. Regardless, get ready for some more pain if the Fed has anything to say about it.