After another FOMC meeting and another 75-basis point rise, inflation remains elevated. The Fed has now implemented a 75-basis point rate rise for an unprecedented three successive FOMC meetings. If the CME’s FedWatch Tool is correct in its predictions, a fourth successive such increase is also on the cards for the November 2nd FOMC meeting. How long can this go on?
The FedWatch prediction is then for a 50 basis point increase at the December meeting, bringing the year-end Federal Funds rate to 4.25-4.5%. Some anticipate another 75 basis point December rate rise to an eye-watering 4.5 – 4.75% year-end figure. Around 40% further suggests that rates will reach 4.75-5% by mid-2023.
OK, the November meeting is still the best part of 38 days away as I write, and much could happen between now and then, including an abrupt end to the Russia Ukraine war – or perhaps more likely a further escalation thereof, given the intransigent positions being taken by both sides. The one is seeking to be able to declare some victory for its aggression and cost of life and equipment, and the other is to regain its lost territories. Either could affect a Fed rate decision one way or the other! Not a recipe for a quick ending to the conflict.
Fed chair Jerome Powell is still adamant in his avowed purpose of reducing the inflation rate to a 2% target, although I still think this rate is unachievable in the short term and at least as long as the Ukraine war continues. The Fed may ultimately settle for 2.5-3% as more realistic, but even this will be difficult to reach. The higher interest rates will undoubtedly lead to recession – perhaps even a severe one - and the problem the Fed will face is to be able to keep the depth thereof under some kind of control.
The next Consumer Price Index (CPI) release date, which will show whether the Fed’s interest rate hikes to date are yet beginning to have any effect on cost inflation, is due out on October 13th, and this will also have an impact on the Fed’s decision-making process at the next FOMC meeting. The following CPI release is due on November 10th. Even this could still be too early for the Fed’s tightening measures to have had a particularly significant effect on the overall core inflation level. However, there have been signs that energy and food prices are coming down from their peaks which will help diminish the headline figure and give the markets some perhaps misplaced confidence. Fuel prices are reducing, perhaps as some European nations have managed to secure oil and gas supplies from sources other than Russia, and food costs as some limited grain deliveries have been allowed to be shipped out of Ukraine. However, the core inflation level ignores the food and energy elements, which will primarily influence the Fed’s decision-making process.
The European war has largely been the defining stimulus for the high inflation that has beset the world. The war itself has been directly responsible for the massive interruption of key agriculture-related supplies to world markets which has raised grain, sunflower products, and fertilizer prices around the world. Meanwhile, sanctions on Russian exports, and retaliatory measures by the Russians, have led to massive oil and natural gas price increases in Europe in particular, which have had a knock-on effect globally. Russia has been the dominant supplier of oil and natural gas to many, if not most, European nations, the majority of which have been strong supporters of Ukraine in its conflict with the Russian invader, which has contributed to the retaliatory action by the Russians. Thus, food and energy price inflation have been a huge factor in world price rises. At the same time, the lingering effects of supply disruptions from the Covid pandemic lockdowns have also been a major contributor to the initial rising price situation. Supply chain issues are extremely difficult to eliminate, not least because some jobs lost during the pandemic are yet to be refilled.
This writer would still advise against investment in most general equities and cryptocurrencies. Even Ethereum, after its much-vaunted ‘merge,’ seems to have suffered quite severely in the post-September FOMC downturn. Precious metals have also been suffering substantially from dollar strength in North America. Still, they are at least in part holding their own in many other currencies, which are also sliding against the dollar. I am not so sure about the longevity of the dollar’s strength, but at the moment, it is the best game in town and has been moving accordingly. However, the U.S.’s massive debt level, and the servicing thereof at these higher interest rates, could affect the greenback’s international rating. Be prepared for a reckoning down the line.
Difficult times ahead in almost all investment sectors are being forecast from many usually reliable sources as recession looms or is, as I have intimated, already with us. My references to the Druckenmiller and Dalio predictions in my article a week ago are borne out, echoed by Goldman Sachs, which also suggests a recessionary stock market crash of 10-16 %. At the same time, Carl Icahn also pitched in with his dire warning on the debilitating effects of inflation on the economy.