It’s Fed Day, boys and girls, and the markets are feeling pretty good this morning, having already priced in negativity from Russia’s invasion of Ukraine. Markets are up, although they trimmed the earlier pop. All eyes are on the Federal Reserve Board meeting where the Fed is expected to raise interest rates.
Usually, rising interest rates mean putting the brakes on business and stocks, so why is the market happy?
Inflation is higher than anyone would like, and the biggest, baddest, bluntest, tool in the inflation fighting basket is higher interest rates. In other words, everyone wants higher rates in order to fix inflation, and everyone is expecting the Fed to give them what they want. So, the markets are up.
What’s the catch?
Well, higher rates really do slow down the economy, and while inflation has surged as of late, remember it’s coming off of years of very low inflation and a pandemic. It may be that the inflation we see is a temporary surge. While it cannot be ignored, it can be overreacted to, and this is where things get tricky. Raise interest rates too high, too fast, and crash the economy. Raise rates too slowly and let inflation get away from us. Add it all up, and Wall Street is hoping for a larger rate increase, even if that isn’t what is best for the U.S. economy. Let’s hope all the PhDs at the Fed care more about data and the economy than they do about what Wall Street wants. Remember Wall Street isn’t about long-term. It’s about locking in the biggest quarterly bonuses possible.
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The catch for today specifically, is that while everyone agrees on a 0.25% increase there is also some support for a 0.50% increase. Virtually no one who isn’t trying to get on TV thinks anything higher than 0.50% makes sense for today, at least after the Ukraine invasion.
So, if the Fed raises 0.25% expect Wall Street to react negatively even though that is the smart play for the U.S. economy.
If the Fed raises 0.50% expect Wall Street to be happy even though that might be too much.
Either scenario is fine.
The problem is with the next Fed meeting and the pressure to “do more” without letting a full 0.50% increase settle into the bones of the economy. On the other hand, if the Fed only goes 0.25% today, another 0.25% next time is likely both the smart play and the easy one to make. The problem will be the pressure to go 0.50% at the next meeting which is especially risky.
If I had a vote at the Fed table, I’d go for 0.50% today with language that makes it very clear there will not be another increase at the next meeting, and that data would guide our actions after that.
Enjoy the ride, everyone 🙂