For the week ending September 22, 2023

News vacuums can be dangerous, such as we saw this week. While, in our opinion, there is only one item to report on, this one item took center stage and is worth understanding.

What Happened: Jerome Powell & the FOMC do not raise rates during the September meeting. Markets decline abruptly.

What’s It Mean: One would assume that the stock market would rejoice over a pause in interest rate hikes when in reality, it was the press conference after the announcement which sparked the selling.

A pause was well telegraphed and already baked into the price action of both the bond and the stock market. However, what was not priced in was Jerome Powell once again harnessing his inner Paul Volker and threatening further hikes.

While not verbatim, Jerome basically relayed to those in attendance that the Fed was sticking with their goal of seeing inflation back down to 2% and was willing to sacrifice jobs to make this happen. When asked about a soft landing, his answer, in our opinion, led to the belief that the economic backdrop was of little concern.

This shook markets considerably and stocks sold off.

Why do we care? Other than the obvious, our concern has to do with the decline in the economic picture that doesn’t seem to be registering on the Fed’s radar. October marks the restart of student loan payments, which will suck billions out of the consumer spending numbers, not to mention the fact that consumer debt levels are already at new highs compared to historical peaks.

While the data continues to point to an erosion in economic activity and therefore a coming inflationary decline, the Fed seems to be ignoring this and proceeding well into the danger zone.

In our opinion, what the Fed does and what they say have tended to be two different things and we continue to believe the economic data will support a further Fed pause and ultimately a much less aggressive monetary policy stance.

As we’ve been writing for some time now, we’ve felt the choppy waters after the first half of the year will eventually give way to new buying opportunities and set the stage for a strong finish to 2023.

The economic data will be critical as we move into the fourth quarter and any hint of a softening consumer or job market loosening should help alleviate the concerns of further rate hikes.

Time will tell.

~ Until next time

Quint

 

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