Federal Reserve: two messages
Today the Federal Reserve meeting ends with a press conference starring Jerome Powell, the Federal Reserve chairman. There have been two consistent messages from the Federal Reserve since the last quarter of 2021-rates are heading higher and the economy is growing. The tools available to accomplish the first objective are cutting back on the Fed’s purchases of bonds and within the year ending the Fed’s purchase of bonds. The other tool is raising the Fed funds rate that influences primarily short-term lending rates. Both of these efforts will reduce GDP growth and also inflation, or at least that is the intended effect.
Intermediate and long-term interest rates have already headed higher causing a large drop in mortgage demand. 30-year mortgage rates are now nearing 3.5% from a low in 2021 of under 3%. This can affect home prices as monthly payments move higher than the monthly cost of owning a home, or affordability goes higher unless prices move lower. There is a delicate balancing act laced with unintended consequences in attempting to reduce inflation. Turning a battleship into a bathtub is a trite analogy. Stimulating the economy is a similar exercise and as evidence, we have our current economic dilemma.
At the same time, we have the current Omicron surge that cannot have helped the economy grow in the current quarter as well as the supply chain delays. The question becomes, is the current Fed policy looking backward or forward?
After the Fed made its announcement for the first interest rate increases for March, the stock market sold off. I have a rule about Fed meetings and announcements-the more important day is the day after-so Friday’s market reaction is more important than Thursday’s market reaction. The volatility of the stock market is very high but not at the extreme we experienced in March of 2020 and not as extreme as 2008-2009 with the Great Recession. However, this repricing exercise is probably not over. Asset values always increase beyond historical fair value and decrease below fair value. Excess on either side is guaranteed. Our position in times like these is to keep an eye on history and situations where asset values decline below their past performance to be selective.
This is earnings season and analysts are more concerned about future visibility than with 4th quarter 2021 earnings-pre Omicron. Netflix had some disappointing numbers in subscriber growth but I received a call from my wife about a message on the TV when she logged onto Netflix about a subscription price increase. Prices are going up and competition in the streaming space is intense. Will subscribers terminate their Netflix subscription for an increase of $1/month? Microsoft also reported earnings this week that were higher than expectations and initially caused a decline in the stock value. Investors thought further however and reversed the decline this morning with the stock gaining nicely today.
An indication of volatility is the average daily swing in the value of the Dow Jones Industrial Average. When it is over 1,000 points from the high to the low, this is not normal and usually indicates more of the same going forward. From Barron’s this week: “Since July 17, 2007, the Dow has had 175 instances of three-day streaks with average trading ranges of 3 percentage points or more. These streaks occurred about 5% of the time in that period.”
These declines happen when there is trouble and these moves reflect the poor visibility going forward. At times like this, however, it always feels like it will get worse but unless there is a trigger in your life that would cause some change in goals we are steady as she goes.
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