As we have all heard, there have been calls for the Fed to raise interest rates by more than 50 basis points at this meeting. In fact, market is pricing in a 75 basis points hike (based on the FFF), but some people are pushing for a full 100 basis point hike as well. We agree that the Fed should indeed raise rates by 75 basis points . If they only go 50…especially after leaking the story that they might raise it by 75…it will hurt their credibility. We also believe that if they are seen as missing the boat with the fight on inflation, it will cause the markets to fall further than they already have this year. Since the stock market has become such an important part of the economy, a loss in confidence in the Fed will cause a loss of confidence in the economy…which will result in even slower growth than we’re already headed for in the coming months.
In other words, we think that a more aggressive hike by the Fed today will help the markets bounce over the near-term. Yes, that bounce might not take place immediately, but given that the stock market is getting oversold and sentiment has become very bearish, we think a more than 50 basis point hike should lead to a bounce before too long.
The problem with this situation is that even though a larger-than-telegraphed hike in short-term interest rates should help stabilize the markets over the near-term, we don’t believe it’s going to help the Fed get the inflation problem under control to the degree that some pundits are saying on an intermediate/long-term basis.
This bout of inflation is driven by SUPPLY issues, not demand issues. Therefore, although a more aggressive Fed should be a helpful step towards fight against inflation to a certain degree, it won’t be a major step. It will not have a major impact on forcing inflation to decline in a speedy way. Yes, a more aggressive rise in interest rates should cause some demand destruction. However, people are not going to stop eating…and they’re going still food to feed their families…and need oil and gas to heat their homes and businesses & transport themselves on a daily basis. Therefore, higher rates are not going to help rein-in prices of the everyday essentials for Americans. As long at the supply chain issues remain a problem…and (especially the war in Ukraine remains a war of attrition), those prices are going to remain elevated…no matter what the Fed does with interest rates.
Paul Volcker gets a huge amount of credit for taming inflation four decades ago. We have great respect for what Mr. Volcker was able to do, BUT we also know that he got a lot of help from other areas as well. For instance, the Iran/Iraq War that began in 1980 played a very important role in bringing oil prices down in the 1980s. Both countries started pumping like crazy to pay for their war efforts. This played a big role in taking oil down from the $34-$37 range in 1980/81…to the $14-$18 range by the end of the decade……Needless to say, when oil price fell by more than 50%, it had a VERY big impact on inflation. Therefore, while we DO believe that Mr. Volcker’s efforts were vitally important, they wouldn’t have been as impactful in fighting inflation if those efforts had not coincided with the fact that the end of the “supply issues” that caused oil prices to rise so much during the 1970s (due to the OPEC embargo on oil in the 1970s) were rectified by the Iran Iraq War.
With all of this in mind, we believe that the inflation issue will remain a problem in the coming weeks and months…no matter what the Fed does. Therefore, we also believe that the headwinds which the markets are facing due to the current inflation problem…are not going to go away as quickly as many on Wall Street have been thinking (even after last week’s CPI number). Yes, these inflation pressure could/should ease somewhat going forward, but with the war of attrition in Eastern Europe, inflation is very likely going to stay stubbornly high for quite some time.
Again, we are looking for a bounce in the stock market at some point soon. We could still get a negative reaction to whatever the Fed announces today, but we do think that the technical set-up for the stock market is getting to a point where we should get another relief rally soon. However, we do not think it will signal THE bottom for this bear market.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.