Your Guidebook to the Fed - InvestingChannel

Your Guidebook to the Fed

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We Need More Than The Fed

As we discuss in our main story, the Fed’s planned rate hikes are meant to stifle demand.

While demand is high, supply has been the real challenge.

The Ports of L.A. and Long Beach continue to have more than 100 vessels stuck waiting to unload. There used to be zero.

Omicron has kept labor away from a market that desperately needs it, especially for blue collar work.

We could solve some of this by increasing immigration from poorer countries. But again…Omicron.

The good news is that Covid cases appear to be falling off as they did in South Africa and the U.K., a welcome sign for our economy.

In order for inflation to really ease, we need to kick up supply within our own borders and solve the issues of cross-border shipments.

While that isn’t likely to happen in Q1, there is hope for Q2 and largely Q3.

We aren’t focused on unemployment data these days so much as the JOLT job openings. When those start to ease we’ll know that things are getting back to normal.

If markets are substantially lower than current levels, that could create a nice buying opportunity.

Fed Day

Your Guidebook to the Fed

Key Takeaways

  • The Fed plans to hike rates to reduce demand and tamp down inflation. We explain how this works below.
  • The market expects rate hikes to start in the March Fed meeting but isn’t sure about how many will happen this year.
  • Look at Treasuries for clues into the market’s next move.

Today is the day the Federal Reserve delivers its interest rate announcements.

Here’s what you can expect.

Why Higher Rates

Every month, with the exception of April, August, and October, the Federal Reserve meets the 3rd week of the month starting on Tuesday with rate announcements on Wednesday at 2:00 p.m. EST.

Interest rates influence lending rates on all sorts of financial products from home mortgages to credit cards for retail consumers, and business loans and debt for corporations.

Higher rates make borrowing more expensive, ideally lowering demand.

You’ve probably seen this graph in your economics class.

The blue curve denotes supply for a product, let’s say aluminum. Our left axis is price and the bottom axis is quantity.

The intersection of D1, our current demand curve, and S leads to P1, our current price.

When the Fed hikes rates, the demand curve shifts to the left (D2).

That creates a new intersection for supply and demand which has a lower price (P2) and a lower quantity (Q2).

This is what the Fed hopes to achieve on an aggregate level.

You can think of it this way.

Let’s say you have $500 in discretionary income. You pay $200 a month in credit card interest. That allows you to buy $300 of toys.

The Fed comes along and hikes rates, changing your interest payment to $300. Now you only have $200 in toys.

What The Market Expects

On the Chicago Board of Exchange website, you can access the current market rate expectations by month.

Here’s a look at the March meeting.

Right now, more than 90% of traders expect the Fed to hike rates at least once in March.

If you go out to December, the picture gets a little murkier.

Traders aren’t sure whether we’ll see 2,3,4 or even 5 price hikes this year.

And that’s why today’s announcement is so important.

It provides clues as to the Fed’s outlook and direction.

What You Can Expect

Markets already sold off in anticipation of the Fed announcement.

Typically, we see increased volatility and price action after the Fed releases its statement.

We want to see how treasuries (TLT) trade as well as the broader market (SPY).

If treasuries rally, it implies markets don’t expect the Fed to hike rates too many times this year. That would put downward pressure on bank stocks (XLF) and boost high-growth tech companies (QQQ).

The Bottom Line: Give markets some time to settle out. We just took a nasty spill and are currently in the middle of a rally. That could easily continue for a few days before markets decide on its ultimate direction.

In the interim, look to the TLT as a leading indicator to guide your decisions.

Higher bond prices (TLT) benefits tech and high growth. Lower bond prices help banks and value stocks.

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