Watch out for the bus! The potential impact of the rate hike and forecast revision from the FOMC is being priced into both bond yields and stock prices, and the adjustment period will likely be fairly rapid. We may see another re-test of the stock market lows in June, which will reverse most all of the portfolio gains this summer.
His message, delivered at a symposium in Jackson Hole Wyoming, was short, concise, and not very sweet. The gist of his speech was that the central bank’s battle against high inflation would last longer than many had previously thought and that interest rates would have to rise higher and stay high until there was meaningful progress bringing down inflation.
…the minutes of the July 26-27 meeting offered some useful, and perhaps encouraging, observations and insights on the economy and the prospects for future Fed policy. Short term interest rates may be close to a peak.
Don’t drop the ball! Juggling the Fed’s dual mandate is the current is a tough assignment.
Bottom line: the Powell Jackson Hole speech reinforces my belief that the Federal Reserve is about to begin the long process of normalizing monetary policy, which means a gradual shift away from the near zero rates begun in March 2020. Rates will eventually rise which warrants a shift to more defensive bond portfolio position with shorter maturities. The writing is on the wall. I do not see this policy shift as a threat to further gains in the stock market, however, and I expect equities will continue to outperform bonds over time.
We are cautiously optimistic about the outlook for next year, but we are far from sanguine. The greatest risks that we see would be largely self-inflicted policy mistakes.
This commentary is the analysis and opinion of Via Nova Investment Management LLC.
