A Wealth of Common Sense: Tough Talk From the Fed

For years, investors have followed a rule: Don’t fight the Fed. The central bank of the US determines monetary policy. And they tend to announce their plans months in advance to avoid anything that may lead to a financial panic.

Last week, the Fed came out and noted that more pain would be ahead in a move to curb inflation. That reversed the market that had been trending higher since the June lows.

The Fed is making it clear that they’re not about to change their policy of raising interest rates anytime soon. If anything, comments from multiple Fed members in the past week make it sound like tighter financial conditions are necessary.

The Fed has plans to bring inflation back down to a range of 2 percent. From today’s rate over 8 percent, much more tightening will be needed.

It’s even possible that a recession will be inevitable. The Fed is trying to avoid that scenario, which they call a “hard landing.” But with extreme inflation underway, and tough talk now, traders need to seriously look at the prospect for a further drop in the markets in the weeks ahead.

Investors should still brace for even higher interest rates in the months ahead, and for the rate-hike policy to continue. That suggests moving to cash now, as stocks and bonds may fall further. That risks losing out to inflation, but if inflation is declining, it may be the best move to make now.

To read the full analysis, click here.