It’s been a long time since interest rates went up, and it’s clear to see that when the market adjusts for rate hikes, it’s not a pretty picture.
When Fed policy pushes up against market sentiment, the Fed always wins. Trying to fight against a tide of money flow is a losing proposition. If you study the direction of the flow, you can take advantage of it, and at the very least, protect your portfolio from imminent disaster.
How the market adjusts for rate hikes
Coming rate hikes have turned the markets sour. Sentiment is poor, volume levels soar (when traders sell), indicators are bearish and price action is awful. We’re in a bearish trend right now that occurred when Fed sentiment reacted to inflationary trends and changed their stance from dovish to hawkish. (Here’s a primer on how to win with bullish trades during a bear market.)
The Fed is acutely aware of the dangers inflation brings to the economy. While Fed Governors may allow some inflation to come into the economy, they did not anticipate the high levels we are seeing now.
The Fed is making the right call
Once the pandemic started, Fed policy became overly generous with several doses of monetary stimulus. Now that the economy is starting to heal from the massive shock brought on by the pandemic, there is no justification to continue with bond purchases and a zero interest rate policy.
The criticism of the Fed today is the same as in the past: they are acting too late to solve the problem. I disagree. The Fed is very much in control of the game. They have gone as far as possible and recognize it. When it’s time to slow down the money supply, there will be collateral damage. A small wound (say, to the stock market’s uber-bulls) will save us from even worse damage.
The Fed Funds Futures show a 6% chance of a rate hike at this week’s meeting, but March’s meeting prices in a 93% probability of a rate hike.
As the market adjusts to rate hikes, more bumpiness will come, but we’ll get through it.