"Don't Fight the Fed;" Don't Ignore It, Either
Eventually, voting members of the Fed likely think, market participants are going to get it through their thick heads that the Federal Open Market Committee (FOMC) is dead serious about doing what it can to bring inflation under control. The rally we enjoyed from July through the first few weeks of August was based on not understanding this, or at least not paying close enough attention to it.
Everyone knows the maxim “Don’t Fight the Fed.” Well, it’s looking as though we should also pay heed to another: “Don’t Ignore the Fed, Either.” Over and over, Fed Chair Jay Powell has explicitly cited a +2% target for the rate of inflation. It’s a difficult level to achieve, and it has been for a long time. Think pre-Covid era: we couldn’t get the economy to grow UP TO +2%, no matter how accommodative the FOMC’s monetary policies became.
Today, we’re at +8.5% on the Consumer Price Index (CPI) and +6.3% Personal Consumption Expenditures (PCE), both year over year. These are among the figures most frequently gauging current rates of inflation, and neither is remotely close to +2%. Thus, “higher (rates) for longer” is the clear-as-a-bell message from Fed participants — St. Louis President James Bullard last week, as expected, but also Cleveland President Loretta Mester today, much less so — and we investors ignore this at our own peril.
Thus, our market indices continue their downtrend for a fourth straight session: the Dow, with 26 of 30 companies in the red today, fell -279 points, or -0.88%; the Nasdaq, which has sheared off nearly -5% in the month of August alone, was -0.56% today. The S&P 500 splits the difference, -0.78%, while the small-cap Russell 2000 had the slimmest slide of all, -0.28%.
Of course we all want the halcyon days of the stock market back, but the numbers aren’t lying and the Fed isn’t kidding around. Which, although the taste of this medicine is harsh, and the specter of having to take it for the next year or more is unpleasant, it’s still better than the alternative: a waffling Fed that can’t decide whether to loosen the screws on the Fed funds rate. This is the sort of thing that caused long-lasting inflation difficulties in the 1970s and keeps the Japanese economy underperforming to this day.
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