Date: May 3, 2023

The Fed is Clueless If They Raise Rates Again Today

Here we go. Another one of those “most important Fed meetings ever” nonsense from the media. “SPECIAL Coverage”. Oh boy. I couldn’t sleep with all that anticipation. Those of you who know me know my usual sarcasm.

Before I continue, let me spell out the market model for today. Stocks trade between plus and minus 0.50% until 2pm and then a bigger move happens. That’s usually to the upside, but Chair Jay Powell’s tenure has changed that a bit.

With the S&P 500 only pennies away from new 2023 highs on Monday, I would have been fairly cautious heading into today as the rally likely used up some buying power. However, with Tuesday’s resurgence of bear attacks in the regional banking sector and the major stock market indices under heavy pressure in the morning, a better opportunity was setting up if the indices closed down at least 1.5%. That didn’t happen as a pre-lunch low took hold with a feeble rally into the close.

What does all this mean? I do not see a strong edge heading into the 2pm announcement today. The indices are not trading well on a short-term basis. Many sectors look like they need one more selloff. And let’s not forget that we still have Apple’s earning after the close on Thursday and the April jobs report on Friday before the open. I imagine we will see a good dose of volatility by 9:30am on Friday.

The Fed is going to raise the Federal Funds Rate by 1/4% today at 2pm. That is what markets are expecting and what is baked in the cake. Of course, if you have been a reader of mine for 6 weeks, 6 months or 6 years you already know how critical I am of the job the Fed has been doing. While I lauded and cheered on the Fed in March and April 2020, Powell & Co. have fallen flat on their faces ever since. How can the most powerful bankers and smartest economists on earth be so wrong for so long time and time again?

I began calling for the Fed to taper asset purchases in late summer 2020. They could have done this slowly, carefully and methodically. And then they could have began to hike rates 1/4% at every other Fed meeting in 2021. Instead, they called inflation “transitory” and you know the rest of the story. Don’t get me wrong. The Fed isn’t the only one at fault. The administration and Congress spend trillions more in COVID packages and infrastructure. Together, they all created the perfect cocktail of inflation.

Besides the rate hikes, the Fed has been quietly but strongly selling assets from their balance sheet. This also serves as a tool to remove the punch bowl from the party. You can easily argue that the level of their assets sales now equals another 1% rate hike on an annual basis. And let’s not forget about the little regional banking issue we have now. Signature Bank, Silicon Valley Bank and First Republic Bank have all failed, causing constant pressure on other regional banks. In turn, this is leading to tighten lending to companies needing funding. In other words, it’s the third method to make money more restrictive.

Remember those four consecutive 3/4% interest rate hikes in 2022? Well, they are just starting to filter into the economy now. So more than 3% higher rates will be impacting the economy from now into 2024. Does anyone with a clue really think Jay Powell and Co. need to raise again? Of course not! The Fed should stand pat and move to neutral. They won’t but they should.

Yet with all this, the new bull market in stocks lives on. It’s now more than 6 months old. Those who keep calling it a bear market rally seem to be ignoring history. Bear market rallies do not last 6 months. This may not be the most robust bull market and it may underwhelm, but until proven otherwise, it is a bull market.

On Monday we bought more levered NDX. We sold PGX and some KBE. On Tuesday we bought HYG, QQQ and PMPIX. We sold TQQQ, PCY, IWN and some mid cap value.


Paul Schatz, President, Heritage Capital