Rates Will Keep Going Up: Powell Unusually Direct At His Press Conference

I just listened very carefully to Chairman Jerome Powell’s press conference. What stood out to me was how different what he said was from what the headlines announced after the announcement of the 0.75% rise in the Federal overnight rate.

Powell made several points, some repeatedly. Investors should carefully heed what he said. If you can read a transcript of the entire press conference. He was a lot less opaque than usual.

In brief his main points were these.

• Inflation has not come down as much as the Fed board had hoped so they will keep on raising rates. The damage done by not raising enough is far worse than of raising too much as they can always correct over-tightening.

• The labor market is extremely tight, much tighter than the Fed expected, and there is no threat of rising rates causing serious job loss.

• The housing market was far too heated after COVID and the current slowdown is part of the reestablishment of more reasonable prices. Current mortgage levels are not high by historical measures. The Fed will not pause raising rates because of the way the Housing market is behaving.

• Government spending is not causing inflation.

• Ex-US countries that are having a tough time financially will be better off if the US can get control of its inflation. The Fed isn’t going to pause raising its rate because of fiscal problems in other countries.

• The Fed governors have not even begun to discuss pausing the raising of the Fed’s rate. Ignore anything you hear that suggests otherwise.

• Expect to see rates going up higher than previous dot plots suggested they would rise.

Bottom line: The Fed Will Keep Raising Rates

They will do this until there is very solid evidence that inflation is abating and moving towards their 2% target. At that point they will pause, but not lower. Right now they see no such evidence that inflation is coming down and will do what they feel they have to do, which is raise rates.

Anything else you hear from pundits is baloney meant to manipulate the market.

What This Means for Stockholders

Get out of the “bad news is good news” mindset. Don’t evaluate the stocks or ETFs you buy in view of Fed policy. If a stock or ETF’s price only rises when investors think that the Fed is going to lower rates, the way that the Invesco QQQ ETF has been doing (QQQ) it isn’t an investment you want to own.

Look for quality companies that are navigating the current conditions well. Buy into companies whose earnings come from their ability to sell products and services to enthusiastic customers.

Pay attention to what is raising a company’s earnings. Avoid companies that can only increase their earnings with buybacks rather than increased sales revenue. Avoid companies whose much higher than average dividends are offered to distract you from their lack of a healthy business. Avoid companies that finance their dividends or buybacks with loans. Be far more alert to how much short term debt a company has on its books as that debt will be rolled over at much higher rates

Remind yourself that healthy markets took place throughout decades when average rates were far higher than they are now. The world doesn’t come to an end if mortgages get up to 7% or 8%. Powell emphasized over and over again that the dangers of inflation becoming entrenched were far greater than the danger of raising rates too fast or too far.

Don’t lump sum large amounts of money into the market right now. Purchase a little every month over the next year or two rather than investing all at once. Because of the way that the large cap broad market indexes respond to every hint that rates are going up, including the SPDR S&P 500 Trust (SPY), the Vanguard S&P 500 ETF (VOO), the Vanguard Total Stock Market ETF (VTI) and iShares Core S&P Total U.S. Stock Market ETF (ITOT), it is likely we will see the broad indexes declining further for at least the next six months.

If you are heavily invested, stay invested. But no money you will need to spend over the next five years should be invested in the stock market right now.

What This Means for Fixed Income Investors

Fixed income rates are now competitive with dividend stocks in terms of providing income as those rates are now over 4%. Treasuries and CDs provide the income you need without the risk of losing the capital you invest.

Avoid bond funds. They all have much too long durations and it may take a decade or more for you to see their NAVs rise to the price you bought in at if you bought over the past several years. Buy individual Treasuries or CDs as you can be sure you will get back your investment when they mature, no matter what the bond market does in the meantime.

Consider building a ladder of shorter-term bonds or CDs. A treasury ladder with maturities spaced three months apart out to a year may be a wise way of benefiting from the current higher rates without missing out on even higher ones.

If you have large CDs coming due, as many of us do who bought CDs three years ago when they were last paying around 3.5%, don’t rush to invest that money in longer duration instruments. Brokerage money market funds are a reasonable place to park some of that money as we wait for rates to continue to climb.

Hedge existing long bond positions. ETFs like Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV) and ProShares Trust – ProShares UltraPro Short 20+ Year Treasury (TTT) which short longer Treasuries may be good investments right now to hedge your existing longer bond investments if you have significant amounts of money invested in bond funds with longer maturities. But don’t buy these ETFs until you understand how they work.