Forecasting the Fed

Don’t fight the Fed.

There are few market adages that carry more weight than this one. Over the last 15 years, the Federal Reserve has continuously stepped in to support market liquidity when the situation turned dire. They embarked on unprecedented quantitative easing experiments as a result of the great financial crisis, keeping a lid on interest rates throughout much of the 2010s. They kept the Federal Funds target rate at 0% for nearly a decade. And when COVID hit, they even went so far as to backstop corporate debt. It all added up to one of the best periods for investors we’d ever seen. Bond prices rose. Stock prices rose even more. And each selloff seemed more short-lived than the last. Being bearish for any extended period proved futile – you can’t fight the Fed.

We live in a different world, today. With inflation at 40-year highs, the Federal Reserve is hyper-focused on tightening monetary policy until demand cools and price pressures deteriorate. Don’t fight the Fed. Until Powell and Co. pivot away from their ultra-restrictive stance, it’ll pay to keep a cautious approach toward stocks.

So what – besides the latest CPI report – is the Fed watching for signs their actions are working?

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