During his congressional testimony last week, Fed chair Jerome Powell changed the game for investors and tradersstates Bob Lang of Explosive Options.

He finally acknowledged that inflation is a problem, so here’s what to expect as the Fed fights inflation. (Side note: That whole schtick about transitory inflation was exhausting. I agree with him—it’s time to retire that phrase.)

As the Fed Fights Inflation, Consider the Landscape

With the Fed now laser-focused on fighting inflation (something they have done well for 43 years and counting), you have to assess the landscape to determine what it means for you as a trader.

Is a less dovish Fed good for stocks? At this point in the cycle, the answer is no. But with rates historically low for such a long period of time, will two or three rate hikes next year really matter?

Let’s look at recent history for the answer. When Janet Yellen was the Fed Chair, she raised interest rates in 2015. It was the first rate hike in nine years, and it led to a few more rate hikes (until Chair Powell cut rates to zero in March 2020). That first rate hike led to some panic selling. Markets dropped 10% over a few months but eventually battled back.

A rate hike isn’t coming just yet. Instead, the bond tapering and lack of liquidity have rattled the markets. Volatility has risen sharply since Thanksgiving week, spurred on the by uncertainty surrounding the omicron Covid variant.

My Advice to Traders

Markets are up strong for 2021, so this is a great time to hit the sell button and take profits. As I like to say, you only need one reason to sell. If the Fed pushes you in that direction, then all the better.

Expect the landscape to continue changing. A hawkish Fed requires more discipline and careful analysis before making a trade. An easy Fed policy will not bail you out of a mistake or poor market conditions. Play it tight: don’t rush into a trade. Low and slow is the name of the game.

Learn more about Bob Lang at ExplosiveOptions.net.