Author: George Yacik

Reasons to be Optimistic

Posted on by George Yacik

As expected, the Federal Reserve raised the target for its benchmark federal funds interest rate by 50 basis points at its mid-December meeting, to a range between 4.25% and 4.5%.

That was down from the 75 basis-point hikes at its four previous meetings, yet the market’s immediate reaction to the move was an immediate selloff.

Was that a classic “buy on the rumor, sell on the news” reaction — i.e., the Fed delivered exactly what Chair Powell had earlier indicated it would do?

Or was there some element of disappointment that the Fed, despite the more modest rate increase, included in its updated economic projections that most officials expect to raise rates by another 100 basis points, to about 5.1%, next year?

But was that really a surprise, given earlier comments from Powell and other Fed officials?

On a positive note, according to the Fed’s revised economic projections, it now expects inflation to fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, putting it at its long-term target.

In November, the year-on-year increase in the consumer price index fell to 7.1% from 7.7% a month earlier, down sharply from June’s 9.1% peak. So it looks like the Fed is optimistic about where inflation is headed, whether its rate-rising regimen deserves the credit or not.

It's also now calling for U.S. GDP to grow by 0.5% next year, unchanged from this year’s pace, before climbing to 1.6% in 2024.

By way of comparison, the economy rebounded at an annual rate of 2.9% in the third quarter following two straight quarters of negative growth.

The Fed projects the unemployment rate to jump to about 4.5% over the next three years, up from 3.7% currently, due to its rate increases. Continue reading "Reasons to be Optimistic" →

The Fed Needs To Practice Patience

Posted on by George Yacik

It’s beginning to look a lot like 50 basis points.

OK, that’s not as catchy as that more famous Christmas tune. But that’s shaping up to be the likely outcome at the Federal Reserve’s next two-day monetary policy meeting December 13-14.

While inflation has slowed only a little bit since the Fed’s last rate hike on November 2 — its fourth 75-basis point increase in a row – the consensus seems to be that the Fed will moderate the size of its next hike to 50 bps, for no other reason perhaps than to see what effect its rate-raising process has had on the economy.

Indeed, the minutes of the Fed’s previous meeting at the beginning of November signaled such an outcome. “A substantial majority of participants judged that a slowing in the pace of increase would soon be appropriate,” the minutes said.

The Fed has now raised its benchmark federal funds rate by a cumulative 375 bps since it started hiking rates back in March, when the rate was at zero. A 50-bp hike in December would put the fed funds’ rate at an upper range of 4.25%.

While a slight moderation in the next increase will be welcomed by just about everyone, from Christmas shoppers to homebuyers to investors, it’s not likely to be the last, and possibly for a while yet.

That was the word handed down this week by New York Fed President John Williams. While he “did nothing to push back against expectations” of a half-point rate rise at the December meeting, the Wall Street Journal’s headline was more hawkish, quoting Williams as saying that “inflation fight could last into 2024,” meaning more rate hikes over a longer period of time than the market expects.

“Mr. Williams said he expected that rates would have to rise in 2023 to somewhat higher levels” than he had estimated back in September, the Journal said.

If the whole point of the Fed’s rate-raising regime is to try to slow the economy and thus reduce the heat under inflation, you don’t have to be a Harvard-trained economist to see that it hasn’t made that much of a dent so far and that it’s a long way from ending its restrictive cycle. Continue reading "The Fed Needs To Practice Patience" →

Is Inflation Truly Whipped?

Posted on by George Yacik

Last week’s consumer price index report showing inflation — at least by some measures — had slowed in October to its lowest level since the beginning of the year set off a massive rally in stocks and bonds.

But is the market overreacting, and does the report necessarily imply that inflation has finally and truly peaked and that the Federal Reserve is just about done tightening? It may be a little too early to declare victory.

The report was at least encouraging, certainly, but whether we’re home free or not remains to be seen. The headline CPI rose 7.7% compared to a year earlier, down from September’s 8.2% pace and the smallest year-on-year increase since January.

The core index — which excludes food and energy prices — rose by 6.3%, down from the prior month’s 6.6% pace. But the monthly increase in headline inflation was 0.4%, unchanged from September.

Did all that justify a 5% jump in the NASDAQ last Thursday and the sharpest one-day drop in bond yields in more than 10 years, with the yield on the benchmark 10-year Treasury note falling to 3.83% from 4.15%? (The bond market was closed Friday for Veterans Day.)

If you believe Wharton professor Jeremy Siegel, who has been saying for months that the Fed is seriously overcounting inflation, then last Thursday’s massive rally was justified.

Not only did he tell CNBC that "inflation is basically over,” but that "we're in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they've been using."

Siegel specifically cited the cost of housing and rent, which he says are overinflated in the data the Fed uses to set interest rate policy. Once the Fed sees the light, he says, the markets are poised for a “good year-end rally," but if it doesn’t, we could be headed for a rate-driven recession.

There’s certainly reason to doubt the Fed’s competence to measure and assess home price inflation, which it has failed to accomplish the past several years and other times before that.

Despite blatant evidence that the housing market was overheating during and after the pandemic, the Fed continued to suppress interest rates, allowing home prices to skyrocket — and keep homeownership out of reach for more people. Continue reading "Is Inflation Truly Whipped?" →

CDs Are Back In Style

Posted on by George Yacik

For the past 20 years or so, old-fashioned saving has gone out of style. Back in the 1980s and 1990s, you could build a fairly respectable—and guaranteed—return on your retirement portfolio by buying bank certificates of deposit.

Since then, of course, we’ve encountered one seemingly endless economic crisis after another—the dot com bust, the 2001 terrorist attacks, the 2008 global financial crisis, and the 2020 Covid-19 pandemic—that have basically forced the Federal Reserve to lower interest rates to or near zero percent.

That policy, of course, largely destroyed the CD (certificate of deposit) market and forced savers, however reluctantly, to buy stocks instead, because There (Was) Is No Alternative, or TINA.

If you wanted to earn any kind of return on your portfolio, you really had no choice but to buy stocks, either directly or through mutual funds and ETFs.

And that strategy has paid off pretty nicely for most people over the past two decades, provided they could stomach the roller coaster ride that the stock market has put them through over that time.

Until now.

Now the Fed has suddenly re-discovered monetary restraint in the form of higher interest rates to slay the inflationary beast it helped to create.

Since the end of last year, when the Fed finally came around to the notion that inflation wasn’t transitory and signaled that the party was over, stocks and bonds have tanked. If your retirement portfolio is only down 15% or so since then, consider yourself lucky.

But there is a positive flipside to the Fed’s new hawkish interest rate policy, and that is that it is now fashionable—and financially savvy—again to start shopping in the CD market. (If you’re in the market to buy a house, however, with mortgage rates now at 7% and rising, I’m afraid you missed the boat.)

Instead of following the stock market’s gyrations, mostly southward, here’s something that might cheer you up a little. Visit the brokered CD page on Schwab or Fidelity or wherever your account is and take a look at the rates being offered. I think you’ll be both surprised and pleased. You’ll want to party like it’s 1999. Continue reading "CDs Are Back In Style" →

Poised for the Fed Pivot

Posted on by George Yacik

Given its past history, both over the long term and especially more recently, it’s inevitable, if not a given, that the Federal Reserve will screw up. This time should be no different. When exactly this will manifest itself is hard to say, but it may be soon—possibly before the end of this year or in early 2023.

The Fed, as we know well, grossly inflated prices and asset values post-pandemic by sticking too long to an overly accommodative monetary policy, holding its benchmark federal funds level at zero percent as recently as March and continuing to buy Treasury bonds, long after inflation was shown to be a lot more “transitory” than the Fed thought.

Now we are all paying the price for the Fed’s belated realization that it was wrong about inflation, as it has raised interest rates five times in the past six months, to 3.00%-to-3.25%, including 75 basis points at each of its past three meetings, and shows few signs of intending to sit and wait and see how those rate hikes will affect the economy.

In the process, the Fed has basically chucked the second piece of its dual mandate, namely maximizing employment, in order to slay the inflation beast.

The American consumer and investor are thus no better than pawns in the Fed’s game of trying to fix a situation it largely created by itself, yet there is no reason to believe that its current policies are any better or smarter than its previous prescriptions, which involved flooding the financial markets with buckets of cheap money it didn’t need.

Now it’s trying to undo all that in a few short months, all while trying not to steer the economy into the ditch, although perfectly happy to throw people out of work and gut their retirement portfolios.

(Question: If the Fed’s actions will force some people to keep working or rejoin the labor force—and there are still plenty of job openings—doesn’t that work against its plan to reduce employment?)

At some point — sooner rather than later, we hope, but no doubt later than everyone else — the Fed will suddenly come to the conclusion that it’s gone too far with tightening and will start to take its foot off the monetary brakes. It may not start to lower interest rates, necessarily, but at least take a breather and see what effect its recent new-found hawkishness has had on inflation and economic growth. Continue reading "Poised for the Fed Pivot" →