So… no surprise today. The Federal Reserve paused rate hikes on Wednesday after weeks of speculation that the official rate would rise to 5.25%
For now, the central bank is holding the line at 5%. Chair Jerome Powell did his best to convince everyone that the central bank could proceed with rate hikes over the next few months. But the data – particularly the declining rate of inflation – suggests we could be done for at least two meetings, which occur every six weeks.
What matters now isn’t how much higher interest rates could go…
But rather how long the Fed may hold rates at or above 5% for the foreseeable future. In essence, the narrative officially changed today.
We’re moving away from “How High” to “How Long at 5%?”
That will set the pace of the markets for the rest of the year.
Is Inflation Tamed? The June FOMC Meeting Can’t Answer
We won’t know if the dragon of inflation is tamed any time soon. But we do know we could end this charade with a simple strategy.
The Fed could cut rates to 3% – largely avoiding the damage to banks and commercial real estate – while telling congress to eliminate its deficits. We’re still spending too much money – and the Fed will have to contend with this problem in the future. For example, while the rate of inflation is now at 4%, we still have an 8.5% cost-of-living-increase (COLA) benefit increase streaming through the economy this year. And the U.S. budget deficit is up roughly 200% from 2022.
We’ve run a $1.16-trillion deficit over eight months since October 2022. That’s just more mortgaging the future to pay for the present – ain’t politics grand).
It’s this spending that will remain an albatross around the Fed’s neck as we move deeper into the year. Tack on the fact that more spending on government benefits also incentivizes inflation in the things that matter: food, energy and housing.
That problem isn’t going away anytime soon.
Looking at the Dot Plot
This market remains Green Hot for momentum. There is ample optimism in the tech sector. But there’s a date you’ll need to circle on your calendar...
That’s July 5. The day after Independence Day, the Federal Reserve will release the minutes from the meeting that concluded Wednesday. During that meeting, we’ll see the dot plot.
What is the dot plot?
In the Fed minutes, the dot plot is a graph that displays individual FOMC policymaker projections for future interest rates. The voting members tell us their expectations for monetary policy, especially around the targeted federal funds rate through the next three years. Below is a visual example from the March meeting by the Fed.
If we look at short-term rate expectations, the implied Fed funds rate signals that rates will remain above 5% for the bulk of the year. But look out past 2025... The expectation is that rates will stabilize around the 2.5% level.
The market expects the Fed will start to cut interest rates during the first quarter of 2024. But don’t bet on that just yet. We could see a significant shift upward in the dot plot, signaling that the Fed might hold interest rates above 5% for longer, and keep rates at higher levels at the tail end (think 2025).
If either the rate expectations for 2025 or the longer-term view move higher, that could be quite bearish for the market. In the worst case, it would be bad for unprofitable companies with lofty valuations – aka Zombie Stocks.
My focus is less on the short-term moves in this market, and more about the opportunities that will emerge in 2024 when we have a clearer understanding of rates and the Fed’s path forward.
It’s one reason why I created Tactical Wealth Investor, a service that identifies stocks that trade for less than the sum of their parts that also have significant upside from current prices.
Rather than speculate on unprofitable tech names, we’re tapping into strong companies with real assets and strong cash flow. They just need time to recover, and their favorable management metrics will likely fuel big moves higher in the future.
Sign up today and take advantage of our latest pick in the energy sector.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Green
Momentum was strong heading into today, and even a sell-off before Friday will likely keep momentum in the green. For more insight, be sure to take advantage of Tactical Wealth Investor. I’ll have a breakdown of this week’s price action, and what to expect after quad witching this week.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
Who in Their Right Mind Would Trade This Friday?!
How many folks do you think are trading this Friday?
Probably not very many…
Simply because most people won’t leave trades open over a holiday weekend.
They fear the market will open lower come Tuesday morning…
*The profits and performance shown are not typical, we make no future earnings claims, and you may lose money. From 9/17/21 through 6/12/23, the average win rate is 72.7%. The average weighted rate of return on options trades was 9.5% over a 3 day average hold time...
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