Folks, we’re getting closer to a major shift in the markets…
Last Thursday, Federal Reserve Chairman Jerome Powell spoke before the Senate Banking Committee. And he had some choice words about the interest-rate cycle.
You see, up until recently, the Fed’s focus was inflation. Powell had made it clear that the central bank would raise rates until it squashed the inflation problem.
And that’s exactly what it did.
Between March 2022 and July 2023, the Fed raised rates 11 times. It was the most extreme rate-hiking cycle we’ve seen since the 1980s.
But now, we’re on the edge of a major shift. Powell is fixing to head the other direction.
It all has to do with the word “restrictive.” And as I’ll explain today, this is the key word we should be paying attention to…
On Thursday, Powell told the committee that interest rates “now are well into restrictive territory.”
Put simply, that means that interest rates are doing exactly what Powell had hoped for.
High rates raise the “cost” of money by making the payments on loans more expensive. That, in turn, slows down lending and business development.
After all, who wants to take out a loan when the payments are at historic highs? That’s exactly where we are now. Interest rates are at 23-year highs.
Raising (or lowering) rates is a useful tool for the Fed. When inflation soars, the Fed can dampen it by slowing down the economy… by making money more expensive through higher interest rates.
But now, Powell sees those high rates as “restrictive.”
In other words, the dampening effect that the current rates have on the economy is too great. The Fed has gone beyond taming inflation. And Powell is likely worried that high rates are preventing natural business growth.
So what does this mean for us as investors?
Well, it means we’re nearing a rate-cutting cycle.
This is a double-edged sword.
Lower interest rates mean that payments on loans are lower. That’s good for business development and lending.
But generally speaking, the Fed doesn’t cut rates until the effects of “restrictive” rates damage the economy. As such, it’s likely we’ll see some of that damage.
So don’t be surprised when unemployment ticks higher. If rates are too high for too long – and unemployment ticks higher for too long – that’s the sort of setup for a recession.
Of course, Powell still thinks the Fed can outmaneuver a recession. And as he said on Thursday…
The does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.
That’s “Fed speak” for: “We’ve just about seen the data we need to lower rates. But we’re not there yet.”
So… when will this major shift happen?
I would think the middle of the year. We know that Powell thinks it’s close, but not quite time yet.
In fact, according to CME Group’s FedWatch Tool, a majority of Wall Street traders don’t expect a rate cut to happen until the Fed’s June meeting.
Just recently, the FedWatch tool pointed to a roughly 60% chance that the Fed will cut the federal-funds rate by 25 basis points (“bps”) that month.
In the meantime, stocks are near all-time highs. And we know that the Fed is close to loosening the “restrictive” interest-rate burden.
It’s convoluted, but the net effect will mean that loans will cost less. And doing business will get easier.
That will push the market to its next leg up.
Good investing,
Vic Lederman
