The Fed Starts to Soften Its Tone

The Fed raises rates (again)... But it could stop soon... There are still lots of jobs... The stock market's next 'new phase'... Not everything will go up... Watch a replay of Steve Sjuggerud's big event...

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The Fed's message is changing...

As most observers expected today, the Federal Reserve raised its benchmark lending rate by 25 basis points to a range of 4.5% to 4.75%. The central bank also said it will continue reducing its holdings of Treasurys and other debt like mortgage-backed securities.

In other words, it's mostly more of the same story we're used to, just with a slower pace of hikes than the 75-basis-point jumps we saw last year. No less importantly, the Fed is changing its tone...

After Fed Chair Jerome Powell did his best Paul Volcker impression in last year's rate hikes, Fed officials seem increasingly leery of doing too much more before seeing what impact the hikes have on the economy.

So far, the Fed-induced economic slowdown has been more of a slow burn. Headline inflation numbers have eased since the summer, and the jobs market hasn't weakened significantly yet outside of layoffs at big tech companies. The economy hasn't crashed, so...

The central bank doesn't want to stop 'tightening' yet...

But today, it signaled that time could come soon...

On the one hand, in a statement today, the central bank's Federal Open Market Committee ("FOMC") said the same thing it has for months...

The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

On the other hand, that same statement omitted a few key phrases that it has included after recent policy decisions. No longer does the Fed think the inflation numbers reflect "supply and demand imbalances related to the pandemic" or that the war in Ukraine is contributing to inflation.

And the central bank said for the first time that inflation has "eased somewhat." It said the big question is no longer what the "pace" of rate hikes will be, but the "extent" of them. To me (Corey McLaughlin), that means a regular ol' 0.25% hike or nothing until further notice.

In a post-announcement press conference, Powell cautioned against anyone taking this as a sign that the central bank thinks it already solved inflation. "The job is not fully done," Powell said, rephrasing a line he made last August in Jackson Hole, Wyoming.

But he also said that "we think we've covered a lot of ground" with rate hikes... that the "disinflationary process that you see is really at an early stage," implying the lag effects of policy haven't hit most of the economy yet... and there's "no incentive to overtighten."

Reading between the lines, the Fed is softening the aggressive tightening stance we've seen for about 12 months... Mr. Market thought so, too. The benchmark S&P 500 Index reversed from a nearly 1% loss before Powell started speaking to a roughly 1% gain by the close.

And through it all, the jobs market is getting even stronger – at least by some metrics... 

Just before the Fed announcement, we saw an interesting note out of the jobs market. The Labor Department's latest data showed that job openings in the U.S. rose to 11 million in December, the highest amount in five months.

That's about 1.9 openings for every job seeker, close to an all-time high..

This means the jobs market is still tight... which encourages pay increases. That's not a bad thing for everyday people, but it's not what the Fed wants to see to ease inflation.

Higher wages mean more costs for businesses, which they'll pass on to consumers. At today's press conference, Powell downplayed the latest data, saying it has been "volatile."

Probably more important, wage growth is substantial right now. Wages rose 7.3% year over year in January, the same rate as December, according to payroll company Automatic Data Processing (ADP)... And workers who switched jobs saw a median increase of 15.4%.

What a time to, you know, actually work...

To help produce something that's in demand, at least.

But this strong labor market – with record-low unemployment and nearly a record ratio of openings to job seekers – certainly doesn't suggest a modest rate of inflation over the long run.

Annual pay raises of 7% won't be sustainable for businesses. Nor will they reassure the Fed that problematic inflation is behind us.

Going a little deeper...

Still, other numbers from the U.S. Bureau of Labor Statistics paint a more promising picture. They suggest that the "cost of an employee per hour spent working" (including the cost of worker benefits) is growing at a slower pace than previous highs. Year-over-year growth for the fourth quarter of 2022 was only around 1%, below the Fed's inflation target.

As our Stansberry NewsWire editor C. Scott Garliss showed yesterday in our free news service, this data is called the Employment Cost Index ("ECI"), and it reveals insight about the path of inflation. As Scott said...

After all, every good we consume or service we use typically involves another person. Think about it this way, other humans are involved in assembling an iPhone or making a cup of coffee. And if the cost of those workers is rising rapidly, well so is the cost of your phone and drink.

The ECI also has tracked widely followed headline inflation numbers, as Scott showed by comparing this measure with the consumer price index ("CPI") and core personal consumption expenditures ("PCE") index, the Fed's preferred inflation gauge...

As Scott noted...

Both of these charts are pointing to a noticeable trend shift in labor costs. Granted, they're not imploding but the pace of gains is slowing. And as we can see, that change tracks closely with the different inflation gauges. Consequently, they're easing as well.

However, this measure would still need to fall in half just to get back close to "normal" levels. There's a ways to go to get there...

Here's what this can tell you...

The pace of headline inflation may be slowing down from record highs, and worker costs are easing, too. But as long as the jobs market remains tight and pay keeps rising to attract workers, the Fed likely won't have much reason to "pivot" and start cutting interest rates to help the economy anytime soon.

If anything, a super-strong labor market without an obvious recession (meaning one talked about in the mainstream media) favors the status quo. That means the Fed would need to make further small rate hikes – or, at the very least, hold rates around their 5% target until further notice – to make dollars more "expensive" and cool the economy more.

Remember, a lot of folks either retired or left the workforce for various reasons during the pandemic and aren't coming back. At least not yet...

Moving on to Steve's big event last night...

Last night, longtime Stansberry Research editor Dr. Steve Sjuggerud broke his nearly two-year silence with a bang. Thousands of folks tuned in to his brand-new video event to hear what he had to say...

They were treated to a lot, including...

• A game plan for how Steve thinks you should prepare your portfolio not only for 2023, but for the rest of this decade... and why right now could be the best buying opportunity of the next 30 years.
• Insights and a bold prediction from a special guest (whose name should sound familiar to you) who Steve described as "a brilliant analyst with probably the highest mathematical aptitude of anyone I've ever met."
• How to get access to six actionable trade recommendations that Steve believes could each soar more than 1,000% over the next few years... including one stock that he shared for free.
• And whether we've seen the worst of the "Melt Down" yet or more pain is still coming...

I won't spoil all the details...

I suggest you give Steve's latest message a listen for yourself... (Check it out for free here.) I can tell you that Steve believes the stock market may be on the brink of resetting into a historic new phase that very few people will see coming.

And while this phase could bring immense opportunity for those who know what to do... it could also mean enormous risk for those who don't, especially for those who own a particular group of stocks. As Steve said last night...

The bottom line is, I think a lot of folks are going to walk away from today feeling much better than they did going in.

But you need to understand this, and prepare for what's coming, as soon as possible.

No other Stansberry analyst is telling this story right now... And it could likely have a bigger impact on your money and retirement than anything else we publish this year.

These types of turning points only happen two or three times every century, and it's critical to identify them because "not everything will go up," Steve said. He explained more last night...

On one side, it could very well end up making you more money than you did during the entire bull market of the last decade...

But on the other side... we could see a significant number of stocks – and I'm talking big names that'll shock you – underperform to a degree you may not believe is possible.

Part of the reason is the topic we discussed earlier today – the plans of the Federal Reserve – but that's actually only a small piece of the story. Powerful longer-term trends and cycles are at work today that most people are overlooking or aren't even aware of.

This might sound like a lot to understand...

Well, first, if you hear Steve's outlook for yourself, you'll agree with me that it's not as complicated as it sounds.

And second, he and his team have a solution for today's market uncertainty: a straightforward, easy-to-understand playbook anyone can use... and the names of a handful of stocks to buy and avoid completely right now.

If you missed the debut of the event last night, you can catch a replay right here.

You'll get the full details, including the two free recommendations shared during the broadcast: one stock that could soar in the months ahead, and one popular stock Steve believes is headed for total disaster.

Don't miss it.

New 52-week highs (as of 1/31/23): Atkore (ATKR), SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), BorgWarner (BWA), iShares U.S. Aerospace & Defense Fund (ITA), MasTec (MTZ), Parker-Hannifin (PH), Revance Therapeutics (RVNC), and Starbucks (SBUX).

In today's mailbag, feedback on our colleague Brett Eversole's guest essays earlier this week... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"The secular market analysis is very interesting. But there's no reason it should begin in 1929. My recollection is that 1907 was a major market bottom (if I remember correctly, J.P. Morgan personally helped bail the country out of that one). That would indicate a secular bull market from about 1907 to 1929. A positive result from that analysis would strengthen your case still further." – Paid-up subscriber Norm R.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 1, 2023