With inflation at a 30-year high, the Federal Reserve is considering an interest rate hike to keep it at bay, prompting a negative reaction from the stock market.
Are you a Jaws fan?
If you were born before the 1990s, then you’re probably a fan of the movie that made MILLIONS of people afraid to ever set foot in the water again.
The classic theme from the movie was something that created both dread and anticipation…
All you need is the open “dun-dun-dun-dun” you’re already reliving some of the worst scenes in your head.
And if you’re an active investor, you’ve had cause to have that theme music playing in your head every time someone mentions the Federal Reserve…because like Jaws circling his next victim, the Fed is getting ready to strike.
Federal Reserve is planning on raising interest rates in order to combat the soaring inflation that’s gripping our economy.
And instead of picturing a dorsal fin sticking out of the water, we’ve got Federal Reserve Chairman Jerome Powell’s perfectly-coiffed hair moving slowly towards the podium to announce a rate hike.
The Coming Tapering
Of course, we don’t know if that will happen…but I and other financial prognosticators are expecting the Fed to formally announce the start of the “tapering” of its crisis-era asset purchase program, which has been one of the primary tools helping to push and support economic recovery and financial markets over the course of the pandemic.
Currently, that asset purchase program is operating off of $120 billion worth of agency mortgage-backed securities and Treasuries per month.
The Fed has previously signaled it would likely begin tapering these purchases soon and continue the process through the middle of next year.
However, as previously mentioned, the bigger worry on a lot of minds on Wall Street comes from the expectation that the Fed will begin raising the interest rates again.
The Fed’s latest monetary policy decision will not come with updated projections on the interest rate outlook from individual policymakers. However, at the conclusion of the Fed’s last meeting, the outlook showed a divided committee for next year, with nine members seeing no rate hikes by the end of next year while the other nine members saw at least one hike.
This rate hike could change everything, as the kind of growth we’re experiencing now will differ wildly from the type of growth we’ll be able to sustain under this accelerated recovery.
Willem Sells, HSBC’s Global Private Banking and Wealth chief investment officer, had this to say about the situation: “The Fed is trying to separate the two and saying, listen, the fact that we start with tapering now doesn’t mean that we start hiking interest rates later on.”
We get that. Giving us TWO of these blows at the same time might have killed off any momentum we’re experiencing – but is it better to die a slow death or be taken out by a sniper?
A Slow Death, Or A Shot To The Head
“The reason, of course, is because there is that uncertainty around the economy, around the labor market, which still has five million more people out of the job market than before the pandemic,” Sels continued. “And then also, when will inflation come down?”
“So the Fed doesn’t want to lock itself into those interest rates hikes yet,” he added. “As long as those earnings continue to do well and the Fed signals that it will be slow with those interest rate hikes, I think the market will continue to drift up, albeit with some more volatility than before.”
And there’s that dirty word: Volatility.
But regardless, the market knows what’s coming down the pike and reacted accordingly on Wednesday, with stocks trending down a little overall.
Just a day after breaking record highs, blue-chip and technology shares dipped almost across the board as markets braced for the central bank’s expected tapering-off of its monetary stimulus.
It’s obvious that the Fed has to do something…and whether that’s raising the rates remains to be seen.
However, what we do know is, some time down the line, they are going to act – and we just have to figure out if that action is going to be sooner rather than later.
My vote’s for sooner…
But my name isn’t Jerome Powell.
“Change is the law of life. And those who look only to the past or present are certain to miss the future.” – John F. Kennedy