We need to be clear on one thing: The Federal Reserve can’t tell the future better than anyone else.
Time and time again, the Fed has proven it doesn’t know what future inflation will look like, despite having the best data and smartest analysts out there. That it not a criticism of the Fed. That’s just the reality of dealing with the unknowable future. We live in a chaotic system with more moving parts than can be modeled, and anyone who thinks otherwise is fooling themselves.
Take for instance the frenzy over rate cut odds in 2024. Remember how Fed Chair Jerome Powell convinced investors that six rate cuts were coming in 2024? It took just three months for that to totally change. It took just three months for there to be the very real possibility that the Fed may not lower rates. And yes folks, there is a distinct possibility that the Fed raises rates this year.
Why a Fed Rate Is Unlikely in 2024
Why would the Fed cut rates when financial conditions are as easy as they are now? The bond market is currently saying liquidity is free flowing. Default risk is non-existent. Economic data is strong. How the hell can the Fed cut rates under those conditions?
Investors are seemingly forgetting that the Fed is a follower and REACTS to financial conditions being too tight or too loose. The Fed clearly is unable to anticipate that because if it did, then Powell would have never gotten the market to think six rate cuts were coming to begin with. The Fed risks severe inflation not only reaccelerating, but exploding, if it adds fuel to the fire by lowering interest rates when there is already little to no default risk being priced into junk debt.
I think the focus is misplaced and misguided. The Fed doesn’t own the bond market. The bond market owns the Fed. And right now, the bond market is saying the Fed may need to raise rates to cause a degree of financial distress among highly levered junk bond issuers.
For inflation to abate, default risk must rise. Fear must rise. Liquidity must fall. None of that is happening, and that means more hikes are likely to come. If they don’t, we may be in far more trouble as the inflation genie gets further and further away from the bottle.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
