The Fed-Life In The Fast Lane

Eager for action and hot for the game

The coming attraction, the drop of a name – Life in the Fast Lane, the Eagles

Virtually, every day, it is one Fed Governor, or one Fed President, that is ringing the inflation bell and calling upon the central bank to step-up and deal with the problem. It is not only the rhetoric, but the tone, that has been rising, by decibels. The St. Louis Fed Chief, James Bullard, has even expressed the possibility of a 75 basis point hike, as part of the inflation fighting equation.

My calculation of “real” inflation is the average of the Consumers Price Index (CPI) and the Producer Price Index (PPI). This number is now at a whopping 9.85%. This puts us at 785 basis points over the Fed’s stated inflation benchmark of 2.00%.Then there are those that worry about the Fed mishandling the situation and causing a recession. I have been on Wall Street and watching the Fed for 48 years now. I have some concerns myself, as they will not only be raising rates but also cutting back on their balance sheet. It is not only the amount here, I note, but also the speed of their cuts. In any event, all of this will certainly mean a higher rate for our government’s borrowing, and a higher cost of borrowing for everyone else.

Yet, between some hoped for soft landing and some recession, there is a lot of ground that seems to be ignored by many. Higher interest rates are going to have a substantial negative impact on many parts of our economy, and investors should be concentrating on them now, and getting prepared, before the Fed initiates its moves.

Negatively Impacted by Higher Interest Rates:

• Treasury Bonds
• Corporate Bonds
• Mortgage Bonds
• High Yield Bonds
• Commercial Real Estate
• Residential Real Estate
• Mergers & Acquisitions
• Stock Buy-Backs
• Bank Loans
• Auto Sales
• Commercial Mortgages
• Residential Mortgages
• Corporate Earnings
• Disposable Income
• Stock Valuations
• The Stock Markets
• Venture Capital

*And a myriad of other sectors

What concerns me, the most, is that we are about to enter a period of rising rates and very high inflation existing at the same time. Even if inflation declines to some extent, it is still miles and miles away from the Fed’s stated goals, and so we are about to be caught in a serious storm, in my estimation.

The Fed is in the “Fast Lane,” no doubt, but I am afraid that the markets are going to be going into “Reverse,” as a result of their actions. Take a hard look at your portfolios, now, and get prepared. Examine your exposure to rising rates and high inflation. Make your moves, before the markets make the moves for you.

“Fasten your seat belts; it’s going to be a bumpy night.”

– Bette Davis, All About Eve

Original Source: Author

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.