The Federal Reserve will meet November 2-3 to discuss the economy and interest rates at the FOMC (Federal Open Market Committee) conference. The Fed has raised rates five times this year to combat inflation. World markets are in turmoil, and American investors have lost more than 20% since the rate hikes started. There is increasing global and domestic pressure on the Fed to back off the aggressive interest rate hikes. The interest rate announcement will be one week before the American mid-term election. Most voters will vote their pocketbook and issues in the economy. The Fed’s actions will affect the economy on election day and Christmas sales. There is a lot at stake. Will the Fed press ahead, pause, or pivot on interest rates?
It is doubtful that the Fed will pivot and lower interest rates. Chairman Powell spoke candidly about Chairman Volker's errors of not being aggressive enough with interest rates to combat inflation. Chairman Volker had multiple failed attempts at controlling inflation. Chairman Powell explained that Chairman Volker only became successful and brought inflation under control when he raised rates as high as necessary. Chairman Volker raised rates to 20%. Watch Chairman Powell’s ten-minute speech about his intentions.
The internet is filled with many types of commentary predicting the Fed’s decision. A handful of market prognosticators are again predicting a pivot. They have predicted a pivot all year and have been wrong five times. Maybe they plan to predict pivots before each FOMC meeting because, eventually, they will be correct, or maybe going against the consensus gets clicks. Maybe they intend to use the “correct” prediction for credibility, selling newsletters, or other nonsense. Pivot rumors seem unfounded. Pivoting is probably the wishful thinking of market players addicted to free and easy money. However, due to the political fallout of raising rates one week before election day, there is a chance of a pause or lower-than-expected increase.
Reasons to Think the Fed Will Press Ahead
There are three main reasons to expect another substantial interest rate increase: inflation data, jobs data, and Federal Reserve statements.
1. Inflation data: The September inflation data came in higher than expected. The Producer Price Index (PPI) was 8.5%. The Consumer Price Index (CPI) was 8.2%, and core inflation climbed to a 40-year high of 6.6%. 6.6% is the highest core inflation number since August 1982. Core inflation is the number the Fed uses to make policy. Core inflation is the CPI minus volatile commodities like food and energy.
2. Jobs data: The September jobs report stated the U.S. economy added 263,000 jobs, and the unemployment number is 3.5%, 0.2% less than expected. Wages were up 0.3% compared to the 0.1% pre-pandemic goal. When the report came out, Mad Money host Jim Cramer said, “The numbers are red hot. It’s like nothing has happened. I think Fed Chief Powell is on the right course. He wants your portfolio down, so you won’t be able to spend as much. He certainly doesn’t want more wage increases…There is nothing good here. It justifies everything they have done, and they have to do more.”
3. Fed Governor Statements: On October 6, the day before the jobs report, Fed Governor Waller spoke at a conference at the University of Kentucky. Waller stated,
“These numbers (core inflation) indicate that inflation is far from the FOMC’s goal and not likely to fall quickly. This is not the inflation outcome I am looking for to support a slower pace of rate hikes or a lower terminal policy rate than projected in the September 2022 SEP. And, though there are additional data to come (jobs report), in my view, we haven’t yet made meaningful progress on inflation. Until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand.”
On October 12, Fed Governor Michelle Bowman stated,
“Naturally, the focus is now on what will happen at the next FOMC meeting and beyond. At this point, for me, it comes down to what the incoming data and other economic information will tell us about the outlook for inflation. If we do not see signs that inflation is moving down, my view continues to be that sizable increases in the target range for the federal funds rate should remain on the table. However, if inflation starts to decline, I believe a slower pace of rate increases would be appropriate. To bring inflation down in a consistent and lasting way, the federal funds rate will need to move up to a restrictive level and remain there for some time.”
Chairman Powell revealed his willingness to inflict economic pain to bring down inflation and long-term market stability. “We will use our tools forcefully to bring price stability. Failure to restore price stability would lead to even greater pain. At some point, it may become appropriate to slow the rate of interest rates increasing, but it will be a restrictive policy for some time.”
Reasons to Think the Fed Will Pause or Slow the Increase
There are a couple of reasons to think the Fed could slow down the hikes for this meeting and then accelerate them again in December. The reasons to suspect a pause or reduction in the expected increase are more speculative and political. The market believes there is a 91.3% chance the Fed will raise 75bps and an 8.7% chance of 50bps. On September 26, the market gave a 72.5% chance of a 75bps increase. The market is more convinced each day that a 75bps hike is coming. There is still a human component to the Fed's decision-making process. Just because the market believes something doesn't make it accurate.
1. Whatever the Fed does on November 2-3, a few days later on election day, November 8, the market will feel it, and many voters will be emotional. The Fed may be vested in the election’s outcome. Democrats have passed several expensive bills and laws. The Fed sells money at a debt obligation to the government, so the Fed makes money from significant government initiatives common to the Democratic platform. The Fed is a group of private bankers, meaning they are a business and must provide solutions to their "customers." Democrats may be a more predictable debt (income) source and a better "customer."
2. Additionally, many Republicans say the first order of business will be to overturn the "Inflation Reduction Act." The Inflation Reduction Act will cost at least $700 billion for mostly climate initiatives. Overturning The Fed not getting $700 billion of debt and however many more trillion during the next two years may be enough reason for the Fed to choose the 50bps option. The Fed may speak about how they are listening to the global voices and want to provide a little relief, but it may just be about the stock market on November 8. The most likely outcomes are that a lower rate hike will cause a short-term market rally, and a higher rate will lead to more selloffs.
3. Christmas/holiday shopping will be affected by this decision. Consumer spending makes up nearly 70% of GDP . Retail sales in November and December constitute about 30% of retailer revenue. If these numbers are believable, then about 21% of expected GDP is in danger. The National Retail Federation said the following about the upcoming shopping season. “43% of consumers say they don’t earn enough to cover the costs of gifts and other holiday items this year. These shoppers are looking for other ways to supplement their income, including dipping into savings (40%), taking on credit card debt (32%), using services like buy now, pay later (25%), and selling assets (22%)." The NRF surveyed in September. If the Fed raises rates 75bps again, it is predictable that more people will have to rely on debt and spend less on holiday shopping. Suppose it is only 43% who can't afford gifts and other holiday items. In that case, the average spending per person will be significantly less than last year. The Fed could state they would do a 50bps hike to save Christmas, but it is probably more about saving GDP. The Fed is paid through taxes. If GDP drops too quickly, collectible taxes will decrease, so the Fed won't get paid.
What Is the Point?
It is unknown what the Fed will do, which is precisely the point. The future is unknown, but even though it is unknown, it is still predictable. It is the specifics that are a mystery, not the outcome. Rates will continue going up, but we don’t know how much. Rising rates will continue to create havoc in the stock, bonds, retirement, Forex, crypto, and housing markets.
Since there is always a certainty of uncertainty, most people utilize an age-appropriate, diversified portfolio investment approach. Age-appropriate portfolios contain less risk as time progresses. The goal is to move away from risk assets and toward safety assets, which is wise and makes perfect sense. It also makes perfect sense to move toward less risky assets when the dangers are clear, present, and predictable. Precious metals have been the primary safety asset for thousands of years. More investors are moving their investments and retirement accounts into precious metals to shelter their assets from the coming storm. Are you ready for what's next? Is your portfolio?
Call the U.S. Gold Bureau Today. We are here to help.