Fed Speech Sinks Market

In his statement at Jackson Hole, Wyoming, earlier this morning, Fed Chairman Jerome Powell asserted that the Fed would “use our tools forcefully” to attack inflation. Powell was abundantly clear (and in my opinion has been clear for some time) that inflation is priority number one for the Federal Reserve. Many on Wall Street are incorrectly assuming the Fed will have their back. In reality, the so-called Fed has put a huge insurance policy at risk-taking for the last 30 years or so. It appears the strike price for this policy to be activated is much lower. Equity markets sold off hard after the speech. The Fed is serious about inflation and warned that further pain is an inevitable future. Powell explained that pain is the “unfortunate cost” that households, markets, and the economy will need to endure to wash out inflation. 

The Impact Of Taming Inflation: Intelligent Decision-Making

A sinking stock market will not be good for home sellers. The pendulum has swung quickly, and buyers are in control. The one boon for housing is that supply is still tight. Many buyers have been waiting for a more buyer-friendly entry point to acquire a new home. Dramatically increasing interest rates present some challenges to both buyers and those sellers looking to step up to a bigger home or downsize.  Intelligent decision-making is back in style. This applies to all investments and big-ticket purchases. Viewing comparables, cost to rebuild, and cost of financing, are all in vogue. This philosophy was forgotten in the last couple of years as momentum took over. We are going back to basics.  

The Fed is gearing up for a 75 bp hike in September. It has been theorized that the Fed balance sheet reduction, also known as QT, is equivalent to another .50 bp. That is the bad news.  The good news is by front-loading Fed hikes and also reducing the balance sheet, we are likely nearing the end of rate hikes. A 4.00% Fed Funds Rate seems to be where the Fed is planning to settle rate hikes for quite some time. As a well-regarded hedge fund manager told me the other day, “we are returning to normal discount rates and a more normal investment environment.” This makes sense and is probably good for the economy in the long term. However, this will be painful to some sectors and to more aggressive investors as a return to normal takes hold in the coming months.