Typically, there is a lot to talk about. Thus, my usual pattern is to get it down fast...like my own personal shorthand, and then clean up a great deal before sharing with you guys, states Steve Reitmeister of Reitmeister Total Return.
However, I thought it might be good to have a look behind the curtain at the "raw material". Meaning that I wrote it down in order as it was live with very little editing afterward. Not that I do a lot of paraphrasing as takes too much time to get exact quotes. Instead, stay focused on the big message. And yes, when paraphrasing I also add in a lot of shortcuts. Or things that make me laugh. Decided to leave that in for posterity...and comedic effect.
The summation is that Fed has not deviated from its message of higher rates for longer. And the job is far from done. And thus, looks like our bet on HIBS early today was on the money. Investors seem to doubt the Fed's intentions given how stocks did not tumble as much as you would think afterward. But do sense that the Fed will wear down investors over time with this message with more downside making more sense than up. Especially as the conversation comes off inflation and turns to the likelihood of recession which begets lower corporate earnings and lower stock prices.
Lastly, I am not in a rush to add more HIBS shares because investors still seem too bullish. Just could be a combo of recent momentum plus the seasonal effects of the Santa Claus rally. May add it in the future. For now, the portfolio is properly aligned with an increased likelihood of more downside in the months ahead. And now here are my raw Fed notes...enjoy!
The market was up about 0.75% at the time of the report...a notch above the 200-day moving average at 4,032. Quickly dropped to about -0.4% going into Powell's announcement. The dot plot was higher than expected...for longer than expected. Unemployment predictions were worse than previously stated at 4.6%. Meaning the Fed is not agreeing with the market view. And making very clear the job is far from done...so get with the program...dummies!
The economy has slowed significantly because of tighter financial conditions and lower REAL wages. (Inflation higher than wage inflation = lower real wages). Wage growth elevated = sticky = come on you guys...do we need to keep saying it...the job is far from done in squashing higher rates.
The market fell another 1% as these comments rolled out. Currently 3967. 3.1% is anticipated PCE inflation by end of 2023...and down to 2.4% in 2024...assuming they continue to do what they are doing to crush inflation from his current level 2X higher. The goal is still a 2% target rate.
Inflation creates hardship (said over and over again). Thus, also means don't complain if we lower growth and raise unemployment to crush inflation. That pain < inflationary pain. It will take time for the full effects of the policy to reduce demand...and lower prices. Still have a long way to go. (Should be counting how many times they say that to make clear how serious they are and that investors are not getting the point).
Here are the median expected levels of the Fed Funds rate versus the current 4.5% level as estimated by 19 Fed officials:
5.1% end of 2023 (5 believe 5.4% or greater), but this does point to probably downshifting to 25 basis points in Feb cut and beyond.
4.1% end of 2024
2.1% end of 2025
These items will create...a sustained period of below-trend growth.
Caution against prematurely ending the policy to tamp down inflation. Again...we are going to be at this for a long time. (Look at the dot plot of expected rates in the future dummies). Not interested in short-term moves...persistent moves. Meaning we are not playing around DUMMIES.
17 out of 19 Fed officials said the peak rate would be greater than 5%. That's because they still see inflation risks to the upside which is why they will stay at this for a long time...persistent.
Labor market imbalances are the sticky part that will take longer to turn to softer inflation. Which is why they will likely have to have higher rates in place for longer. (How many times does he have to say it). But also explains why 4.6% unemployment may be the peak alongside modest +0.5% GDP growth creating a soft landing. (More stagflation than recession is their base case).
They hope. Odds are very low of this happening as planned especially given all the other signs of recession in the air. But they don't want to say that out loud (hey we are on purpose creating a recession...so they leave it like we believe we can create a soft landing...if not, remember that pain is less than the pain of long-term inflation).
Expected to make faster progress on inflation than they have...and thus behind the curve...and thus keep raising rates for longer...and why the dot plot is the way it is...
Hey, we all see inflation cooling...but you guys see it being higher than most everyone expects...why so different? (Question to Powell)
The goods sector is where we see inflation cooling the fastest. Housing/shelter/rents are also cool because of the pain brought on by higher mortgage rates.
But its wage inflation is too resilient. Of course, we want higher wages...but relative to 2% inflation. (Aka we need to tamp down the labor market enough to bring down wage inflation and that is likely when the inflation fight will be done).
No current signs of wages slowing. Again, this is public enemy #1 in the fight against inflation. And why we are not done. And I can't believe you dummies don't get this. Wasn't it clear from the wage component of the 12/2 Employment Situation report (OK that might be me saying this section...by I feel this is his underlying tone ;-)
We like seeing the cooling of CPI for the past couple of months...but it's a broader subject. (Aka Wage inflation)
Long way to go.
"Where are we at in the amount of pain we have received vs. where it is going in the future?"
The maximum pain would be letting inflation stay hot and we failed to act. So, the pain from Fed policies to reign it in brings some pain...but not as much as if they allowed inflation to become entrenched.
Not going to change the 2% inflation target. Not on the menu whatsoever. And that is where we intend to go. Stocks at 4,004... haven't noted S&P for a while. Don't know why it has fought back so far. Just don't see any notion that would make a logical person want to buy stocks. The disconnect between the Fed and investors at this moment is HUGE. And has been huge for the past two months.
Yes, possible investors are right, and Fed is wrong. But I wouldn't bank on it given the consistency of what the Fed has said. They are just not the kind to blink at the poker table. Price stability pays dividends to the economy for a long, long time. Which is why they are waging this war against inflation.
Do you know what you are doing? Yes...we know what we are doing.
But the conversation was more like do you realize that if you raise rates above 5% and inflation comes in under 5% that you may be more restrictive than you realize...and is that okay??? Of course, we know that. That's the whole point. What part of this are you DUMMIES not getting?
Labor force participation probably needs to come out to renormalize wage inflation...but there is currently no sign of that happening. And thus, if it did start happening in 2023 it likely wouldn't be enough til late 2023 or into 2024. This again says the Fed is right in their view of inflation still being too sticky and persistent..and the market is wrong in being bullish this early before the job is done.