One Way to Happily Ignore the Fed

Forgetting (and remembering) Jerome Powell... People want to believe central bankers... What they're saying now – and what to watch... A cat-and-mouse game... One way to happily ignore the Fed...

I nearly, happily forgot about Jerome Powell...

The holiday season, even with some travel snafus, allowed for some time to reflect and refresh. And while I (Corey McLaughlin) was doing that, the whims of the Federal Reserve and Chair Jerome Powell thankfully escaped their deep etchings in my mind.

It was nice, though it didn't last too long.

Powell is back... Talking. Talking. Talking. Already. It's only 10 days into the year, and central bankers and other economic policymakers can't help putting on an uppity conference (in Sweden) and broadcasting it live so we can hear how smart they are.

Too harsh? Or not harsh enough?

As much as I'd prefer to ignore any "news" the Fed is making – really – we wouldn't be doing our jobs if we didn't pay attention to what central bank officials are saying...

We need to acknowledge the Fed, even if we don't like it...

After all, central bankers think they can control the "market" and save everyone from themselves. We know they can't... Their biggest "accomplishment" behind their policy moves has been widening the gap between the haves and have-nots over the decades.

But the Fed continues to influence the economic backdrop in the U.S. It never stops manipulating the economy with various justifications (now it's about making things tougher for businesses to cool inflation). And it never stops hinting at what it might do with interest rates and other policy ahead – setting the narrative by talking, talking, talking.

As Raghuram Rajan, a former central banker and a professor of finance at the University of Chicago, wrote in the Financial Times today...

Central bank statements have influence because people still believe the institutions will do what they say.

I can't explain why folks still believe the Fed, except that it has a bully pulpit to schedule press conferences and put out economic projections. But even when the Fed can't do what it says, and has been recently proven wrong about its past statements, people seem to want to listen.

In 2020 and halfway through 2021, they insisted inflation would be "transitory." So, the Fed concluded that the best idea for a happy U.S. economy would be near-zero interest rates while creating billions of dollars from nothing.

Was it?

Here we are again...

Now, the central bank is saying we need "higher rates for longer... and longer" to ensure inflation goes down to "normal" levels. Is that the right idea? Well, it seems the market thinks either that it's not or that the Fed doesn't mean what it says.

Either way, what the Fed hides in the details of its economic projections is that normal 2% inflation levels might be a far-off dream, even if the pace of inflation is slowing today.

Here's my takeaway to keep in mind no matter what happens in the short term: The consequences of a higher-rate era are only beginning to become clear, and we're only at the beginning of a long, messy back end of a massive debt-fueled bubble.

But the market will play a cat-and-mouse game with the Fed anyway, no matter what I think.

So, today, we'll take a brief look at what Powell and the Fed are saying at the start of 2023... examine what their next moves could mean for the markets... and, importantly, offer an idea for how another inevitable year of Fed-speak could benefit your portfolio.

What they're saying – and what to watch...

Today, at a conference hosted by the Swedish central bank – to talk about central bank independence – Powell avoided giving a monetary-policy outlook...

Instead, he made headlines for saying the Fed should avoid melding monetary policy with short-term social-policy agendas like fighting climate change. He said Fed independence is crucial to fighting inflation, which tells you where his mind remains focused.

But others in Fed-land have been talking...

San Francisco Fed President Mary Daly said in an interview yesterday that a 25-basis-point and 50-basis-point hike at the Fed's next meeting are "on the table" for her.

Also yesterday, Atlanta Fed President Raphael Bostic told reporters something similar... "Eventually I want us to get to 25-basis-point rate hikes."

Notice the nuance, "to get to 25-basis-point rate hikes." That means Bostic's goal is continuing rate raises... even if inflation keeps coming down.

The next Fed meeting is set for January 31 to February 1...

And the story about this one is how much the central bank will raise rates. At its last meeting, it set its benchmark fed-funds rate – which filters throughout the economy – in a range of 4.25% to 4.5%...

Powell and other Fed officials have said they want their policy to get to a certain but unknown "restrictive" level – to bring inflation down without totally crashing the economy. Such is life with financial manipulation...

Bettors in the futures markets mostly believe that the Fed will get to a range with a top end closer to 5% or 5.25% at the most this year. Then, they believe, rates will plateau and perhaps the Fed will start to cut rates toward the end of this year...

Specifically, the market is currently expecting another 75 basis points of hiking over the next few months.

But as Bostic added today, the plan for more Fed rate hikes "is going to be a function of the data that comes in." A good amount of data will be published between now and the next Fed meeting...

The next big number...

Later this week, the U.S. Bureau of Labor Statistics will publish its consumer price index ("CPI") figures for December. This is a key reading on inflation in the U.S.

As our Stansberry NewsWire editor C. Scott Garliss has recently shown, while leading indicators of inflation suggest it will come down significantly in the year ahead, it will likely remain elevated.

I'd be surprised if the CPI doesn't head lower much of this year... But the next big important question is one we've addressed several times before: by how much?

If inflation isn't cooling fast enough for the Fed's liking, the markets haven't cratered and job losses haven't piled up, more rate hikes could be in the offing. That could drive stock prices lower and keep a bear market going.

Conversely, if inflation declines into deflation territory, that'll give the Fed officials pause. They could slow their pace of hikes, then eliminate them altogether, and perhaps settle at a "terminal" rate lower than current expectations. That could boost stock prices.

Still, this scenario might sound OK, but it doesn't mean the Fed will be cutting rates –"pivoting," as everyone has started calling this reversal – anytime soon. That's way down the road, perhaps later this year at the earliest... by the Fed's own expectation. And that's an important distinction...

Here's why this matters...

Rate hikes don't hurt everyone or every industry equally. Interest-rate-sensitive industries like real estate are impacted more than others... though everybody feels a tighter economy eventually.

What's more, higher rates can eat into stock market valuations regardless of how businesses are performing.  

The interest-rate environment always factors into Wall Street's calculations about whether it's worth buying a stock... A low-rate environment like we've mostly seen the past 15 or so years is generally good for stocks because you need to buy stocks to get a decent return. Higher rates generally hurt stocks because investors can get a big "risk free" return from government bonds, so they have less reason to take on the risk of owning stocks.

That's why Warren Buffett calls interest rates the financial equivalent of gravity: Higher rates pull asset prices down further.

And Fed-watching this year could help realize some critical timing, too... History suggests that bear markets don't truly end until the Fed begins cutting rates and making financial life easier again. As we wrote in the September 19 Digest...

The past seven bear markets didn't end – or "bottom" – until after the Fed began cutting rates and unwinding all the effects of an economy-slowing rate-hike cycle.

So a cat-and-mouse game will be played this year...

Let's say the economy and markets are collectively a mouse and the Fed is the cat. The Fed is always trying to control (catch) the economy and markets... but can never quite do it.

That's because it can't know everything that will happen in the future. Economies and markets keep doing things the Fed doesn't expect.

The Fed keeps reacting, gets close to the goal that is in front of it, and then another story or consequence occurs that changes its goals.

The Fed's dual mandate from Congress is "price stability" and "maximum employment."

Back in the early days of the pandemic, the government wanted to keep the economy from crashing, so the Fed (and Congress) made financial life easier for businesses and people with loans and direct payments.

In 2020 and early 2021, the Fed made monetary policy so easy that demand for many goods eclipsed supply and many people decided not to work when they got checks or debit cards mailed to them directly from the government.

Ta-da... Then inflation became a problem. The Fed didn't admit this until about six months after it was painfully obvious to anyone buying lumber, or meat, or any number of things.

And we saw record-low unemployment and a labor force participation rate that has fallen to its lowest since the 1970s.

The stage of the game now...

Now, the Fed sees that the jobs market can take what Powell calls "pain" as a consequence of inflation-fighting policy like higher rates.

Investors will weigh expectations of what the Fed will do – along with a universe of other potential variables considered by investors or traders based on their own interests – every time Jerome Powell or Fed officials speak over the next several months.

Now, what I'm about to say might make it feel like everything we've talked about today is a waste... It's not. It's part of the reason we're getting to this point. Fed officials are going to say a lot of things this year, and they will make decisions...

Along the way, inflation will follow a path, likely down... Corporate earnings could be hurt across many industries. A recession is very possible. At that point, the Fed will have some decisions to make beyond what it appears to have settled on as policy for now.

That is a fed-funds benchmark rate around 5% until further notice... along with continued trimming of its balance sheet. That's the Fed's baseline right now. It has made that clear. And history suggests until the Fed begins cutting rates, or indicates that it might, it'll be a tough environment generally for stocks...

Of course, though, things could change... and that's what the markets are grappling with today... What will the Fed do?

It's an obsession of many market watchers. And in many ways, the expectations are more important today than what actually happens later.

Here's the good news: Short of Powell saying the Fed will be either cutting rates or taking them well above 5%, he can't say much that would dramatically and directly impact your portfolio over the long term.

The short term is another matter, though...

People hang on the Fed's every word. I've certainly spent enough time talking about the central bank over these past few years... Prepare for another year where the Fed is the headlines again. Over and over.

And while it's frustrating to free-market lovers, this can also be an opportunity...

What if I told you there's a way for you to invest and trade that doesn't care what the Fed does, or whether it's right or wrong? In fact, if the Fed is wrong (a decent bet based on past history), this could actually work to savvy independent investors' advantage.

That's because Fed uncertainty means volatility...

This can be bad, or it can be good, depending on how you view things. If everything goes how the Fed expects, the markets will like that. But if anything goes differently, markets can bounce all over the place.

This is a traders' dream...

The overall market may churn sideways or go up or down, but as we've been saying lately, not all sectors and stocks are created equal. We've already seen that in the Fed's existing rate hikes.

And as the Fed plows ahead with policy – whatever it ends up being – there will be winners and losers. As these expectations make their way into the markets, stock prices will move. The key is putting yourself in position to take advantage.

One way to do this is to just ignore the Fed, or any other "news" for that matter, and focus on two important things: time and price. That's the mantra of our friend and Ten Stock Trader editor Greg Diamond. Greg says he doesn't care about the "why" of any market move... just about when it might happen and how it may look.

You'll hear him say this over and over again. It's one way to happily ignore the Fed.

This trading approach led him to call the top in U.S. stocks at the start of 2022. Not only that, but he also made recommendations last year that could have doubled your money six different times.

Now, he's expecting a rare market event in 2023 that could make winners out of some stocks and big losers out of others...

We can't know what will happen for sure. But we can prepare and weigh the risks versus rewards. As we mentioned yesterday, that's exactly what Greg – a former trader for a $65 billion pension fund – plans to talk about in his new video event on Thursday.

He'll explain why the last time we saw market conditions like this, you could have doubled your money 10 different times. And he'll get into more detail about his strategy and why it's a great thing to consider in today's market environment – or any environment, really.

The event is free. We just ask that you sign up in advance to make sure you don't miss a minute. Just for tuning in, Greg will also share a free recommendation and much more about his outlook for 2023. Click here to sign up now.

How to Make Volatility Work for You

Ten Stock Trader editor Greg Diamond joined and Dan and me on the latest episode of the Stansberry Investor Hour for a wide-ranging chat on technical analysis, cycle theories, Greg's outlook for 2023, and how to trade the year ahead...

Click here to watch this episode of the Investor Hour right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 1/9/23): Arafura Rare Earths (ARAFF) and SLB (SLB).

In today's mailbag, feedback on today's market being a lukewarm coffee, which we suggested in yesterday's Digest... and comments for our Dr. David "Doc" Eifrig, who recently shared tips on how to stick to your New Year's resolutions. We shared Doc's advice in last Thursday's Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I was reading yesterday's Digest this morning and, as I reached for the last of my tumbler of coffee, read...

If we think of the markets as a cup of coffee, we see today what might be an hours-old pour, resting near room temperature, and filled with half-and-half. It won't kill you, but it's not a great or satisfying drink...

"Yup... kinda how my coffee was... Cheers!" – Paid-up subscriber Bob F.

Corey McLaughlin comment: I'm glad to hear the imagery was effective. Cheers, Bob.

"Hey Doc, Loved your comprehensive list of tools and aides to help accomplish new goals.

"This works for the pragmatic, but not the dreamers or those who rarely accomplish much beyond the scraps that fall off the trash truck of life as it rumbles through the pot holes. And I believe that's most of us...

"We talk a good game, are wizards at certain niches and trivia, but stumble through the more nuanced aspects like motivation, self-control and true determination. And our successes often spring from serendipity... not the dogged struggles in life's trenches.

"And that describes most of us, most of the time, like the flash bulb. Brilliant for an instant... then interminably lackadaisical.

"So we read your good advice to remember 'how,' but so rarely 'do.' We dub that 'human nature'... But I do admire and appreciate your bent to inform, even if it rarely translates to an action plan for too many of us." – Paid-up subscriber John L.

"Aloha, Your essay on 'false hope syndrome' and setting/keeping goals was interesting. For myself I've found that creating a system or routine that results in achieving my goals works best. Your discussion of making new habits touches on this concept.

"The quote, 'Show me a man's habits and I can predict his future' addresses this also. I think Doc Eifrig once used this quote to illustrate how healthy habits promote one's future health. I've always achieved my goals by establishing a system, habit, or routine." – Paid-up subscriber James P.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 10, 2023