What You Can Expect from the Fed This Week (and What to Do About It)

The central bank will likely increase the Fed Funds rate by 75 basis points. Unless we see large amounts of insider buying, this will set off a December selloff that will rival what we saw in December 2008 and December 2018.

In case you think that's the darkness before dawn, the Fed still has another 150, possibly even 200 basis points to go. That's a lot, friends.

And yet daily momentum turned positive last Friday, fueling a blistering rally to close out October. It culminated with net shorts frantically covering after Apple failed to implode the market.

A lot was going on - and a lot will go on.

I'll walk you through what I see coming just around the corner...

Here's What Stocks Have to Deal with in November

First, the blackout period on insider transactions is ending, so it will be fascinating to see if executives start to load up on their own stocks - or if they're anticipating another move down.

There's still a raft of earnings reports to get through, as well. We've heard from Apple, Amazon, Microsoft, and Alphabet (FAMG). I didn't trade a single set of mega-cap earnings; Apple is now the heaviest weight on the S&P 500, the NASDAQ 100, not to mention the entire world of passive investing.

And, finally, the Fed's preferred inflation metric will print this week. I had expected a little more focus on that figure. For now, I remain long. But I don't think I'll be here, well, too long given all the warning signs.

First - interest rates themselves. Anyone expecting a dovish pivot on Wednesday should probably take profits at 1 PM that day. Inflation isn't under control... and the blunt hammer blows of rate hikes will continue to fall.

I'm already seeing projections that inflation will come down "at a blistering pace next year." That's not how any of this works - barring an absolute implosion of the economy.

We're still spending way too much money at the Federal level - running a deficit north of $1 trillion. We're increasing cost of living adjustments for social security and other government benefits for 70 million people. We are putting that money into circulation. Does anyone in government understand how inflation works?

Meanwhile, real interest rates - the consumer price index less the Fed Funds rate remain negative, at -5.2% to put a point on it.

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I want to know why so many people on Wall Street need help understanding basic monetary policy and how the money supply works. People spend money when real interest rates are negative.

They know that their money will be worth less in buying power in the future. Remember, many European central banks turned to negative interest rates over the last few years - to spur aggregate demand and get people to spend.

Real rates were turned negative.

Then there's the basic understanding of how long it takes to bring inflation under control. It takes years to get inflation down - proven by more than 100 years of data analysis. Larry Summers explained this by highlighting a recent chart from Deutsche Bank analyst Jim Reid.

Inflationary forces are a long-term issue - a very long-term issue.

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Goldman Sachs projects that we'll peak on the Fed Funds rate at 5% in March. But if the Consumer Price Index comes down to that range - many speculators anticipate that the Fed will start to cut interest rates. That's where the problems start up again.

I've said a few times - the Fed is a blunt hammer. The central bank can hammer away aggregate demand by raising interest rates.

But it can't print food, oil, housing, or anything else.

Without a robust supply-side solution to these essentials, the Fed is set up to fail and repeat the mistakes of the 1970s.

If the Fed starts cutting rates, aggregate demand will increase. That will spur more money chasing the same number of goods. That creates inflation - all over again.

As I noted two weeks ago, there's a political element at work here. The United States government will still provide considerable social benefits and increase those payments due to inflation. Why? Because they are political machinations.

Many people are comparing Jerome Powell to former Federal Reserve chair Arty Burns, who oversaw numerous policy errors during the 1970s. But - remember - history never digs deeper into understanding the problems that Burns faced.

As Burns noted in 1979 - the government expanded and spent a lot of money on social programs in the 1970s. We had the Great Society, the War on Poverty, the Vietnam War, a dramatic expansion of Social Security in 1973, and the second wave of the Alphabet Soup Agencies created in that decade.

When it came to the Great Inflation from 1965 to 1981, politicians blamed greedy oil companies, stock market speculation, and even unions.

But - as always - it was monetary policy that enabled massive budget deficits to pay for social programs.

In 1972 alone, the M2 - a measurement of retail savings and small deposits - increased by nearly 13% in a year.

So, what does it say about our system that effectively created 40% of all money in existence between 2020 and 2021?

Do people think that inflation will - poof! - go away?

Clearly, some do - even some in charge of making it go away. But they're badly mistaken.

A minimum of 6% for the Fed funds rate will be necessary. And if it doesn't get to that level or the Fed pivots, I'm buying any commodity that isn't nailed down.

About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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