Brace For Powell

The Federal Open Market Committee (FOMC) will announce its decision for federal fund rates later this afternoon at 2:00 p.m. EST. Shortly after, Federal Chair Jerome Powell will address the nation on the Fed’s decision and their outlook for the future. According to the Fed dot chart (see below), as of the last FOMC in September, the Fed is not planning to increase rates past their current levels. 

(Fed Dot Plot https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html) 

However, in an interview with Powell a couple of weeks ago, he stated that he would not be able to rule out another rate hike due to the economy's strength. Just last week, GDP for Q3 was released and beat expectations by .2 % (4.9%), which we have not seen since 2021 when rates were at .9 while we are currently at 5.25-5.50. That being said, there is a decent chance that FOMC will announce a hike tomorrow, which will be a surprise to the markets since the general conscience (according to the Fed fund rate watch tool) is a 96.7% chance of no rate hike for this meeting and 3.3% chance of a rate cut (see below). 

(Fed Dot Plot https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html) 

There is a byproduct to the rate hikes that are helping the Fed do its job in fighting inflation: the bond market. In a weird combination of the increased issuance of bonds by the Treasury due to its gross stimulation during 2020-2021, a booming economy, and the Fed raising rates in their current manner. Yields have spiked up to highs not seen in over 15+ years. Since bonds have an inverse relationship with bonds, bonds have been on a downward spiral with seemingly no end. This effectively makes bondholders sell, which increases rates, effectively cooling the economy. Powell did agree in his most recent interview that this is helping the Fed, although they are going to press on their current path until they achieve an inflation rate of 2%. As an investor in this environment, it’s best to reduce positions in high-growth stocks and add some exposure to yields like the 10-year TNX or 5-year FVX. This has been going on for a while, and we could be at the tail-end of things, so if you are planning to add exposure to yields, do so cautiously. If you are on Twitter, now known as “X,” feel free to follow @ThrashCapital for more content!