Postcards: Avoiding a Wipeout from the Fed's Rate Decision

The Federal Reserve held interest rates at 5.25% today. Today, we dive into what the Fed does in the first place and what comes next for the central bank.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Avoiding a Wipeout from the Fed's Rate Decision]( The Federal Reserve held interest rates at 5.25% today. Today, we dive into what the Fed does in the first place and what comes next for the central bank. [Garrett {NAME}]( Jan 31   [READ IN APP](   Market Update: The Fed didn’t cut rates, but we analyzed the decision and explored the central bank’s pathway toward the March rate meeting. We’re back to our regularly scheduled analysis. --------------------------------------------------------------- Dear Fellow Expat: Picture this. You’re standing on a paddle board in the Gulf of Mexico. You’re well-balanced - dead center, knees bent. No problems, right? Now, walk up to the nose of the board… What happens? The board has no weight in the back to support it. You plunge into the water. Now, you stand up again and go to the back of the board. Same thing. No support. You’ll fall into the water. But if you stand in the middle of the board… you’ll be in good shape. That’s what it’s like for the Federal Reserve to manage its dual mandate. The Fed has to keep prices stable and ensure maximum employment. Stable prices mean the Fed needs to keep inflation in check. They don’t want prices to rise too fast, which can cause severe economic problems for hundreds of millions of people. Raising rates too much is like putting too much weight on the front of a board. The Fed wipes out. They send the economy into the water. But the Fed has to put some pressure on the economy because inflation erodes the purchasing power of our money.  If they pump too much cheap money, it’s like standing on the back of the board, and again, they wipe out. They have to find a middle ground. The same goes for managing maximum employment. They want as many Americans to have jobs as possible. However, they must balance employment and fueling higher wages, which can drive inflation. Balancing is tough. If you’re a mile from the beach in the middle of a thunderstorm, you only have one tool to get you home: a six-foot paddle.  Of course, a paddle board isn’t a $26 trillion economy. That’s what interest rate policy is like for the Fed. The interest rate is the paddle to navigate the storm. It’s their primary tool to manage inflation. When they raise the Fed funds rate, borrowing becomes more expensive.  It can slow down spending and investment, helping curb inflation – but at an economic cost. Lowering it can stimulate economic activity, which is good for employment, but can bring inflation roaring back. Today’s policy decision shows the difficulty of finding that balance for the Fed. [Upgrade to paid]( Today’s Insight: The Fed Keeps Rates Unchanged Today, January 31, the Fed left rates unchanged at 5.25%. They raised rates from 0% to that level in the last 20 months, the fastest pace of hikes ever. I’m concerned about the economy, especially how much the government spends to keep it afloat. When the Fed starts to cut, we might see a sharp move lower due to all that overconfidence in the market bringing gains forward. The Fed and other central banks around the globe are providing significant support to the system. But the market didn’t like the news. This is a stock market addicted to cheap capital. So, it wasn’t shocking to see technology stocks drop - especially after ugly forecasts from Microsoft (MSFT) and Alphabet (GOOGL). I continue to emphasize the repetitive cycle of market surges, Fed promises, corrections, and rate-cut expectations that have plagued the financial world since early 2022. The markets like to get out in front of the Fed, fueling rallies and creating FOMO. Then, the central bank reels the markets back from overbought territory like a fisherman. The chart shows where fear kicked in over the last 25 months, and optimism and global liquidity expanded after that October 2022 low. All those highs and lows are directly linked to shifts in policy expectations.  Tops and bottoms. Lower highs and lower lows.  And now, higher lows and higher highs. Regardless of what happens, we’re in good shape. [Our Model Portfolio]( was up 9.5% in January, compared to the S&P 500 return of roughly 3%. So far as when the next interest rate cut comes, I’m leaning toward June. I’d like two prints of consumer inflation under the Fed target and at least one negative jobs report. Given the recent uptick in inflation despite large layoffs at Fortune 500 companies, the Fed feels stuck. The Fed said the “economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.” The central bank also said it’s “strongly committed” to lowering inflation to its 2% target. The market reaction wasn’t great. The Nasdaq 100 fell 1.5% heading into Powell’s statement, while the S&P 500 dropped another 1%. I liken the Fed’s action today to a surfer caught in the undertow, paralyzed by caution. Powell and his central banking team seem to fear a catastrophic wipeout at every turn. I think we’re facing another near-term top from overbought conditions. With tech earnings reports tomorrow, job data on tap, and Apple and Amazon numbers on Thursday, now is the time to hedge. The market appears to be under the spell of some Fed-induced volatility. Let’s see what Powell has to say… Stay positive, Garrett {NAME} Secretary of State Disclaimer The characters in this “Financial Adventures” are fictitious and based solely on the author’s experiences and knowledge. The economic and financial analysis and research are real and conducted and written by the author for educational purposes. Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()