A Legendary Investor and His Legendary Advice

It might have been the shortest Fed speech in history. 

At least I can’t remember one this short.

A week ago Friday, at the Fed’s Jackson Hole symposium, Jay Powell stepped up to the mic and took 9 minutes — just 9 minutes — to announce to the market and the world that “price stability” is the Fed’s first and foremost concern right now. According to the big guy… ”Without price stability, the economy does not work for anyone.”  

Period.

Then he went on to share — by any regular Fed speech standards — some terrifyingly bad predictions about what we could expect as a result of the Fed moving forward on their mission. Namely:

Reducing inflation is likely to require a sustained period of below-trend growth

And…

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.

The market’s subsequent decline signaled its disapproval of his message.

“Don’t Fight the Fed”

When it comes to your investments, “don’t fight the Fed” is one of the most important rules you can follow. It was coined by legendary market analyst Martin Zweig…

I credit much of my own trading success over the past two decades to continually trading in the direction that the Federal Reserve is moving. 

I did some in depth analysis on that very rule in the current month’s issue of Streetlight Confidential. (You can subscribe here, if you’d like to read the full issue.)

It’s an undeniable fact that Fed actions have an outsized impact on the direction and performance of the market. And right now, they’re taking actions that promise to have a very significant impact. Here’s what I mean…

What is most noticeable about the recent Fed actions, is the speed with which they’ve hiked rates. 

Fed Funds Rate

Source: Tradingeconomics.com

The last time they tried to raise rates off the zero floor, it took them 3 years to get to 2.5%. This time… six months!

The challenge the Fed is facing is two-fold. 

First they have to show they’re serious about reining in inflation. But how high rates may have to go to do that, they won’t speculate. 

The other problem is, they have to reverse the zero interest rate mindset that has gripped the market for the past nearly 20 years. (Something they created!)

It’s a close call, but breaking that mindset may be harder than breaking inflation!

The overall point? The economy is in trouble and the Fed realizes it!

Mark Your Calendars

There are two important dates coming up to keep on your radar. 

Next Tuesday, September 13, the Bureau of Labor Statistics (BLS) will announce its headline CPI report for August. After touching 9.1% year over year in June, it cooled just a bit to 8.5% in July.

The following week, on September 20-21, the FOMC will meet and announce its latest policy update on interest rates.

Barring some crazy, 4-sigma outlier inflation report (like it coming in at 12%) the Fed is going to hike rates either 50 or 75 basis points. Last week’s employment numbers were still strong enough to suggest that the economy can withstand a 75 point move. If inflation cools a bit (to say 8-ish%) they may pull back a bit and only go 50.

Either way, they’ll have bumped rates higher than they have been in the last 14 years! 

This is one of the most difficult fights the Fed will ever get into.  

And “don’t fight the Fed” is a rule to keep in mind!

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily