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Mind Game ?

01/06/2022

Trying to read somebody’s mind, especially their intentions, is a fool’s errand . . . but here goes anyway!

Jerry Powell is head of the Federal Reserve System, which is the only agency with the duty to control inflation.  He knows his predecessors have proved that raising interest rates will lower the inflation rate and is anxious to start.  However, because the stock market hates surprises, it is customary for the Fed to forewarn investors.  Powell remembers what happened in 2018 when he raised interest rates faster than the stock market had been warned to expect.  It was ugly!  Then-President Trump seriously considered firing Powell and did it very publicly.

Today, inflation does need to be better contained, and the Fed knows it must act, but doesn’t want to shock the stock market again, like it did in 2018.  Yesterday, minutes of last month’s Fed meeting indicated they will slow down growth in its balance sheet or quantitative tightening, which reduces stimulus we no longer need, plus raising interest rates sooner than expected, maybe as many as four times this year.

The lesson from the 2018 market reaction is for the Fed to do less than expected.  Yesterday, the minutes were hawkish, scaring the market enough for the Dow to drop almost 400 points.  When the Fed actions are less than forewarned, as I expect, the market will react differently from 2018 . . . and that’s good thing.

Negative surprises drive the market down, while positive surprises drive the market up.

Good Luck, Jerry!

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