I watched intently as newly seated Fed Chair Jerome Powell delivered his first testimony to the House Financial Services Committee earlier this week. For the most part, he said about what I expected in response to congressional leaders, many of whom were clearly showboating for the cameras.
It was hard to not waffle between feeling like I wanted to scream at the TV or yawn at the predictability of it all. Turn off the volume and the session would make a good substitute for Animal Planet.
Then came Rep. Carolyn Maloney's (D-NY) question about what could cause the Fed to raise rates more than the three times that the Fed's most recently issued guidance calls for.
Powell wasted no time stepping in "it."
I don't know whether that was intentional or if he simply made a rookie mistake. Either way, that really doesn't matter much in anything other than an academic setting (which is of course what the Fed is) or a political talk show.
Yields jumped to fresh highs and stocks marched sharply lower in minutes when Powell made the case for more the possibility of more rate hikes than forecast, saying in classic Fedspeak that "each of us [meaning FOMC members presumably] is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn't want to prejudge that."
I've been watching global markets for 35 years and I knew right away what Powell meant because I have a functional Ph.D. in interpreting Fedspeak and applying it to financial markets – not literally, of course, but figuratively.
Fedspeak, in case you're not familiar with the term, is what traders euphemistically call the highly specific, ultra-confusing language used by Fed chairpersons (specifically) and Fed governors when they are making public commentary or, as was the case here, appearing in front of lawmakers and TV cameras.
Fedspeak typically has no bearing on reality and is used most frequently when the person being questioned does not actually want to answer the question being asked or simply hopes the level of technical detail will overwhelm the questioner to the point where he or she moves on. In exceptionally rare cases, Fedspeak is actually used to communicate.
All sarcasm aside, imagine asking a five-year-old…
…what happened to all the cookies in the cookie jar?
A fluent Fedspeaker might tell you…
…the preponderance of demand led to an asymmetrical increase in consumption prior to the regularly scheduled data point associated with evening intake production and delivery.
The five-year-old would have simply said, "I got hungry and had a snack before dinner."
I'm exaggerating to make a point, of course, but not by much.
You and I would have answered Rep. Maloney's question saying simply, "the economy is growing faster than we expected so it's very likely that we may have to raise rates more frequently than we (the Fed) told you (the public) at the end of our last meeting."
What Raising Rates More Than Expected Looks Like
Heading into his testimony, December Fed meeting notes called for three rate hikes in 2018. Since then the economy has strengthened further – forcing the Fed to reassess its models. Jobs data, housing, consumer optimism… all are sharply higher, which means, presumably, that inflationary pressures are building.
I believe we'll get four, perhaps even five, rate hikes, and I say that because real inflation – meaning what you and I experience in our wallets – is running at double or even triple the official rates calculated by the Beltway Boys. Simply put, there's some catching up to do.
That'll mean more volatility ahead as the "game" continues and the news outlets dissect each new comment from Fed officials in excruciating detail. However, I'm not particularly worried unless rates top 4.5%, at which point all bets are off.
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Don't get me wrong, though.
We all know that endless stimulus and "accommodative" policies will end badly. That's beyond debate because there has never been a recorded instance in market history where rising rates have not ultimately led to a market correction.
The only questions are when, what causes it, and what do you do in the meantime?
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.