March 23, 2023

Optics Over Policy

By Peter Bower

The Federal Reserve’s recent ¼ point interest rate increase was done more to preserve the aura that it continues to be resolute in its fight against inflation. There was little fundamental reason to further increase rates. Inflation is falling, and past increases have broken a few banks and are stressing more and more businesses. Breaking the economy is no way to fight inflation. It is like killing the patient to fight a disease. The Fed knows this.

The Fed is close to being finished with this tightening cycle. Once significant damage is being done, they simply must stop – they are there! The good news is that inflation is falling. Patience is now what is required. Current interest rate levels are more than enough to constrain economic activity. The market, through the collective wisdom of all its participants, already knows this. That is why the rates on longer dated treasury bonds have already declined.

Stock market investors also know the Fed is just about finished. That is why stock prices have held up. Prices are likely to go higher as participants anticipate lower rates, and a pickup in business activity six to eighteen months out. Remember, stock market and economic cycles are not synchronized. Stocks lead. Stay steady my friends; we are coming to the end of this ugly period.

The Lonely Bull