Playing Chicken with the Fed Real Cap Daily #19

As anticipated, the Federal Reserve raised rates again yesterday to 4%. The market and pundits spent the entire afternoon parsing words trying to figure out a pivot. Are Congress, Wall Street, and Pundits playing chicken with the Fed?

Since 2008, we have experienced extremely low rates. In response to the Great Recession, the Federal Reserve encouraged the economy with historically low rates. This was known as Quantitative Easing or QE. The process of rate normalization began around 2016, but was cut short due to the pandemic in 2020. QE was initiated again so we would not fall into a depression. You can see the trend in this chart. The money supply was increased through purchases of treasuries and mortgage backed securities. Since 2020, the M2 money supply has skyrocketed with Trillions of dollars flooding the economy. Effectively, the Fed was complicit in bad behavior until Jerome Powell’s reelection. At the beginning of the year with Inflation running rampant due to massive spending and bad policy, the Fed Reversed course beginning Quantitative Tightening or QT. Essentially, the Fed is taking money out of the system. 

Is the market playing chicken with the Fed? I would suggest yes. Looking at this chart of the Sticky CPI vs the Effective Feds funds rate, you can see the Feds Funds Rate rose above the rate of inflation before inflation turned. The market keeps calling for a pause. Historically, every time there is a pause such as the 1970’s, inflation reared its ugly head again. At this point, the fed funds rate is well below the rate of inflation. This means rates are going higher until we see it higher than inflation. Yes, the Market is playing chicken with the Fed.

If you have any questions on investing in this environment, real estate is a traditional hedge against inflation. We would be happy to go over investment opportunities that may fit your needs.