Will the Fed Pivot before a Crash Happens?

There’s been frequent mention of a Fed pivot in the last two months. Both sides on the topic have fashioned evidence showing how their view is the correct one.

For instance, there is the view that Powell and the Fed will not pull back on raising interest rates because they must get inflation down. Given the height and persistence of inflation, and constrained supplies, this makes the stock market crash view a compelling one.

News from the Cleveland Fed on the September inflation numbers shows a .3% growth which puts the year over year inflation reading back above 8%. 8% inflation is well beyond what the Fed can tolerate and therefore another couple rounds of 75 basis point hikes will be likely.

Inflation rate vs Interest rates last 40 years.
Inflation rate vs Interest rates last 40 years. Screenshot courtesy of gzeromedia.com

Crushing Inflation with a Sledge Hammer

A growing crowd of experts and economists however, now fear the supply chain issues and inflation are so intrenched that this course of Fed tightening and rate rises is pointing to disaster in the markets.

Further rate hikes will push the housing market into a crash heading, and could topple the Dow Jones, S&P and NASDAQ in 2023. Crash talk seemed silly in 2022, but now people are less confident of their previous positions and statements.

In a Yahoo Finance post, Bank of America’s chief investment strategist Michael Hartnett stated that the $46 Trillion wipe out in stocks and bonds this year will continue until the Fed pivots and turns dovish.

As to when such a panic by central banks might occur, Hartnett believes mid-November is a possibility, arguing that the S&P 500 could fall another 10% from current levels by then, which would “force policy panic right when the G20 meets on November 16.” from Yahoo Finance report.

Yahoo further estimates that based on historical data, the S&P 500 has had 20 bear markets in its lifetime, and with an average peak-to-trough decline of 37.3%, it would result in the S&P 500 falling to about 3,000.

That would tough for the US administration and J Powell to stomach, given most feel he and his Fed crew have failed miserably and have no credibility.

That would lead us to believe a Fed pivot is likely. The question is when. A change in the Senate and House on November 8th would also support a pressured pivot for the Fed. The politicians would begin reviewing supply chain and production regulations that are squeezing supplies and raising costs.

Fund Manager Cathie Woods

Ark Investment Fund manager Cathie Woods says a Fed pivot could happen in the next 3 months. She believes inflation is already falling and will hit the 3 range in 2023, so all is fine.

Increasingly, such regulations are being relaxed, including the recent gasoline production regulations quashed by Democrat Gavin Newsom in California. As attention is focused on US regulations, they could be retracted resulting in a flood of cheaper oil and gas and lower housing costs.

Author Nomi Prins said in an interview with CNBC, she believes the Fed is likely going to pivot away from its hawkish trajectory in 3 stages. She believes it’s the disconnect between wealthy investors and institutions as the “real economy” widens that will cause this.

This means we could see interest rates slow, even though they haven’t created enough braking power on the economy, and they will increase the balance sheet again.

Fed Chair Powell has reiterated his belief that Americans will be feeling much pain in the fight against inflation. The Fed may be blind to the real reactions on the street about what’s really happening.

MarketWatch in a post suggests market volatility will be the key to a Fed Pivot. There reasoning is: “as the Fed is hiking rates based on lagging economic data, the risk of a policy mistake becomes heightened. By the time economic data deteriorate, the preceding rate hikes have yet to impact the economy, which eventually deepens the recession” — from MarketWatch report.

The Feared Policy Mistake

Basically, just the process of fighting inflation opens up risks to big disasters that the Fed won’t be able to deal with. It’s like handling bottles of nitroglycerin by hand. So they’re calling this the feared “The Policy Mistake” event.

Other reports have a pivot happening when the Fed rate hits 4%. And for the raging US dollar to come back down, they will have to bring the rate back down.

President Biden is also planning hiking the capital gains tax for wealthy investors to the highest in the world. This is really bad timing which could result in a shock for the markets.

Diminishing Confidence of the American People

It could be Americans don’t believe in Powell and the Fed, or the current US administration about needing to induce a recession. The fact is, a lot of people want to buy homes and they don’t want to lose the jobs they just acquired. It’s bad timing for a recession. The homelessness condition and foreclosure rates of late also make Americans very unhappy.

The Crats too have only 5 weeks left to the elections, and a big change in government that the media won’t even discuss could be just ahead. On November 9th, things could look very different.

A Fed pivot is wise, because it could stop investors from throwing in the towel on the markets which basically is the worst part of the crash — when stocks are considered worthless and the big sell off dominates the news headlines.

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