MARKET UPDATE (9/22/23)

The Fed is playing the “pay attention to what I say and ignore what I do” game. It’s working.

ANALYSIS

The Fed has raised rates historically fast. So fast in fact, that there are no comparisons to guide the next steps. That’s a problem for economists who live and die by the data.

The risks are two-fold: Raise too high, too fast, and risk overshooting into a very deep recession. However, don’t raise enough or start cutting too early, and risk inflation exploding again.

For the last 18 months the Fed has been talking tough and acting tough (raising rates.) Now they’ve decided to stop acting tough - but talk even tougher. They are achieving this by stating they think rates will stay higher for longer in 2024 and 2025. This is pure posturing and in no way indicative of what they will actually do. But it is having the effect they want by keeping traders on edge - and rates up.

THE GOOD NEWS

This is a necessary phase before we can hope for rates to stabilize and (eventually) start to decline. Historically, economic events overtake any rate forecasting by the Fed. A recession, political pressure, or any number of black swan events consistently leads to faster and deeper rate cutting than the Fed had planned on. There is an overwhelming chance this happens again. The only question is – when.

WHAT’S NEXT

New home sales and consumer confidence reports coming out Tuesday. That will set the tone for the week.