The head of the Federal Reserve tried to sound more hawkish today amid skyrocketing inflation…but, investors aren’t buying it.
Speaking virtually at the Fed’s Jackson Hole symposium, Fed Chairman Jerome Powell doubled-down on the news we already knew – that the Fed intends to scale back (or ‘taper’) its aggressive money-printing $120 billion a month bond buying program this year. (Story continues below.)
But, like I said, we already knew that.
As for interest rates? Well, don’t expect an increase in rates anytime soon — and the investors couldn’t be happier.
There will be no rate increases even though Powell himself admitted inflation has risen enough to meet his test of “substantial further progress” towards the Fed’s goal of 2% annualized inflation.
Actually, consumer prices have swelled 5.4% annualized for two straight months. Meanwhile, the record breaking 7.8% jump in producer prices indicates inflation is heading even higher next month. But, apparently, for our Central Bankers, this is just evidence of “substantial further progress.”
Note: You’ve got to love “Fed speak.” Because, in English, (or “real speak”) inflation is not something to be defined as “substantial progress” but, instead as a massive tax on every-day Americans that eats into families’ household spending and savings.
No Change In Rates Expected
Anyway, Wall Street need not worry. You see, the Fed (as usual) wants to have its cake and eat it too.
Powell emphasized the challenge of the Delta variant and wants to remain flexible as a result. As such, rates will remain ultra low.
In fairness, the Fed has some economic headwinds it can point to as a reason to remain flexible: today’s consumer spending showed slower than expected growth, clocking in at an increase of 0.3% versus the expected 0.4%. And, there’s growing fear of more lockdowns amid an increasing Covid infection rates. Meanwhile, sentiment overall is weakening in part due to the tragedy overseas in Afghanistan.
As such, the market exploded higher – with the S&P 500 gained more than 30 points, or 0.68% to 4500. The Nasdaq was up 126 points, or 0.85%, to 15,070 and, the Dow jumped 0.63% or 212 points to 35,425.
Investing In A Low Rate Environment
Bottomline, as I’ve told you before, I’m a realist so don’t fight the Fed.
You may not agree with Fed policies and like me, worry about inflation. Nonetheless, you still want to be invested in U.S. equities because these policies will continue driving the markets higher. That said, I look for ways to be diversified in this market and hedge against long term inflation.
Real estate (including REITS because they’re liquid), commodities (specifically gold and oil), and currencies outside the U.S. dollar (assuming a currency is govern by a disciplined Central Bank) are all ways to invest with inflation in mind.
The Fed has given investors effectively no choice but to assume greater risk. You can know longer leaver your money in traditional savings account, nor treasuries, and expect to collect a nice pile of interest. So, smart investors will remain invested with diversified portfolios while simultaneously devoting part of their portfolios to hedges against inflation.
We all have to hope that the Fed is not inadvertently creating a new set of risks by effectively forcing investors into equities. Historically, the Fed has been responsible for pretty much every bubble in recent history and, for sure, this could be another. Continue to watch the yield on the 10 year Treasury bond for signs of fear. It’s currently trading at 1.3% suggesting the bond market, like Powell, doesn’t believe inflation is anything other than temporary.
Time will tell.