Good morning, traders…
Jeff here.
Yesterday, Federal Reserve Chairman Jerome Powell gave a speech with some macro insights into the current state of the economy (and the Federal Reserve’s plans for the future)…
Powell doesn’t want to raise interest rates further if he can avoid it, but he also needs concrete data to justify any rate cuts.
And so far, he seems to care more about supporting stock prices than tackling inflation head-on.
The big question remains the same: Will the Fed cut rates … and when?
On the one hand: If Powell signals a rate cut soon, it could lead to a counterintuitive sell-off because many traders believe it’s already priced in.
On the other hand: If he delays a cut too long, the market and overall economy could suffer.
It’s a tricky situation as the Fed is between a rock and a hard place, in a lose-lose scenario of sorts…
With that in mind, let’s break down Powell’s main points from yesterday’s speech, understand their potential effects, and discuss how you can use this information to inform your trading strategy…
Inflation is Improving
What Powell Said:
Powell noted that inflation is starting to slow down. He highlighted that recent reports show that price increases for goods and services are becoming less rapid.
Specifically, a key measure of inflation, called the personal consumption expenditure (PCE) index, showed that inflation has slowed to 2.6% (from a peak of 9.1% in June 2022).
Potential Effects:
When inflation slows, the cost of goods isn’t rising as quickly. This is good for consumers because their dollar goes further.
For businesses, it can reduce the pressure to raise prices, which can help stabilize the economy (also good for consumers).
But remember, if inflation gets too low, it can signal weak demand, which could slow economic growth.
This is why the Fed has a target inflation rate of 2%, that’s the “sweet spot” of economic growth vs. inflation.
What Traders Can Do:
You should keep an eye on inflation figures — like CPI, ISM, and PCE reports — which can affect the entire economy (and thus the stock market).
Lower inflation generally means higher stock prices because it often leads to reduced interest rates in the future, which is good for business profits.
This is exactly why the market is so obsessed with the Fed’s interest rate schedule…
No Interest Rate Cuts … Yet
What Powell Said:
Despite the positive signs, Powell mentioned that the Federal Reserve isn’t ready to lower interest rates yet.
The current rates are between 5.25% and 5.5%, the highest since 2001. He stressed that the Fed wants to be sure that inflation is really under control before making any changes.
This is more of the same — he’s been echoing this tune for months.
Potential Effects:
High interest rates can slow down the economy because they make borrowing more expensive for consumers and businesses.
We’ve had relatively high rates for two years now, but so far, the economy has remained strong.
That said, I believe a rate cut could actually cause a sell-off in stocks (but more on that later)…
What Traders Can Do:
Understand that high interest rates impact different sectors in different ways…
On the one hand, bank stocks have benefited from higher rates because they’ve been able to charge more for loans.
On the other hand, sectors like real estate and utilities have struggled because higher borrowing costs can reduce demand.
It’s not as simple as “higher rates are bad for stocks.” They’re actually good for some stocks, and understanding this unique relationship can help you trade the right names in specific interest-rate environments.
Balancing Risks
What Powell Said:
Powell then talked about the challenge of deciding when to lower interest rates. This is the “rock and hard place” the Fed has been stuck between for two years now…
The Fed is still trying to find the right balance and traders are still trying to predict the central bank’s future decision making.
Potential Effects:
This balancing act is crucial to pay attention to…
If the Fed lowers rates too soon, it could cause inflation to run rampant again.
But if they wait too long, it could slow the economy too much, potentially causing a recession.
What Traders Can Do:
Traders should watch for signals from the Fed about their future plans.
Statements from Powell and other Fed officials, as well as economic data like employment and GDP growth, can provide clues.
Being able to anticipate these moves can help you position yourself to take advantage of changing economic conditions.
Future Expectations
What Powell Said:
The market is expecting the Fed to start lowering interest rates later this year, possibly in September or November.
This is a shift from earlier in the year when they thought rate cuts might start as early as March.
Potential Effects:
If the Fed does lower rates, it could boost the stock market because lower rates make borrowing cheaper, which can lead to more investment and spending. However, if the Fed delays, it could lead to market volatility as traders adjust their expectations.
What Traders Can Do:
You might prepare for potential rate cuts by positioning yourself in stocks that tend to do well when rates are lowered, like technology.
You should also stay flexible and be ready to adjust your strategies if the Fed’s plans change.
My Thoughts on Powell’s Comments
Powell’s mission has been the same for the better part of a year — he doesn’t want to rock the boat.
The stock market (and the U.S. economy) has been incredibly resilient in the face of record-high inflation and interest rate hikes.
Powell is probably sitting there thinking he pulled off a miracle, and he’s afraid to make any drastic moves that could upset whatever balance has been created.
Notably, I think Powell is worried about a rate cut leading to a sell-off in stocks.
The market is already pricing in a fall rate cut, so it could become a “sell the news” event when it actually occurs.
Additionally, the election in November is a massive catalyst in and of itself. Can the Fed possibly cut rates with the market at all-time highs right before a historic general election? I wouldn’t get your hopes up…
But the important thing is this: Powell seems to care more about buoying the stock market than he does about the economy and the consumer.
We have no choice but to pay attention to his comments as he’s one of the most important figures in global finance, but I take everything he says with a grain of salt.
Happy trading,
Jeff Zananiri
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