“Hey, big boy, you be the end of the rope.” Coach Maples let us play tug-of-war a few times in PE class. Being a chubby kid with strong legs, the team captain usually put me on the end of the rope. Right now, stock investors and the Federal Reserve are in a tug-of-war, and I’m just hoping the economy has strong legs.
According to the Wall Street Journal, the Federal Reserve (Fed) raised rates another 0.25% in its continued inflation fight but signaled it might be finished raising rates. Another rate increase wasn’t what investors wanted, but because inflation is still high, this is what investors needed.
In the stock investors versus the Federal Reserve tug-of-war, the investors are pulling for lower rates to increase stock prices. But, on the other hand, the Fed is pulling so hard in its fight against inflation that it’s willing to create a recession to avoid inflation taking root in America.
Investors need to recognize that the Fed is serious about fighting inflation. Instead, the investors feel the negative effects and want it to stop. Many of these negative effects are because people didn’t think the Fed would be this aggressive after so many years of zero rates.
The most concerning negative effect is the continued bank failures. The 2nd, 3rd, and 4th largest bank failures in history have happened in the last sixty days, according to Peter Mallouk. The problem is those bankers didn’t think the Fed would raise rates this fast and didn’t prepare for it.
I believe the Fed had to raise rates. In my opinion, the Fed overreacted during the pandemic and then was slow to attack inflation when it started skyrocketing. So they had no choice but to raise rates again last week. They have to get inflation under control to protect the dollar and fight off the Russia/China alliance to remove the dollar as the preferred world currency. The Feds must win this inflation fight to maintain America’s financial dominance.
I also think Congress needs to raise the debt limit. I hate debt and teach against it, but letting the US Government default isn’t an option. They need to keep raising the debt ceiling if that’s what it takes to beat inflation and protect the dollar’s value. I see no greater threat to America’s greatness than letting inflation erode the dollar’s purchasing power and losing its status as the preferred world currency.
The Fed and Congress need to do what’s best for our country and long-term economy, even if it means a short and weak recession in the short term. Our economy, which has been strong during all the craziness over the past three years, will get through this last remaining pandemic hiccup.
The next few months might be bumpy, but before you know it, the Fed will be cutting rates, and the economy will be rocking again, maybe even by the end of this year. Don’t get too nervous about the next few months, and stick to your investment plan. There are opportunities in every market if your investment plan has the flexibility to respond to them.
I don’t remember who won in those elementary PE tugs-of-war, but I remember they didn’t last long. This part of the investment cycle won’t last long, either. So stay in the game, and don’t forget to move your feet.
Have a blessed week!
Dr. Richard Baker, AIF®, is the founder and executive wealth advisor at Fervent Wealth Management.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged & can’t be invested in directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
