The Last Rate Hike
Jul 25, 2023
Have you ever seen The Last Jedi? No? Not a Star Wars fan? Indulge me as I give you a bit of a synopsis. The Last Jedi follows the protagonist, Rey, as she seeks the aid of Luke Skywalker, in hopes of turning the tide for the Resistance (the good guys) in the fight against Kylo Ren and the First Order (the bad guys).
In November of 2021, chairman of the Federal Reserve, Luke Sky...err ... Jerome Powell declared war on Kylo Ren ... I mean, inflation. It led to the Fed's most aggressive tightening cycle in four decades, which was fitting because the economy was amid the highest inflation in four decades.
The Fed raised rates to a range of 5.00% to 5.25% over the past 16 months. By all accounts, its actions worked. There has been a marked slowdown in the consumer price index from about 9% in June of 2022 to 3% now. However, it has also led to a sharp drop in spending by consumers, a cooling labor market and a serious decline in manufacturing activity. You can't make an omelet without breaking a few eggs.
Over the past year, we played a guessing game regarding how much the Fed would raise rates at each meeting. One after the other, each CPI release and subsequent Fed meeting would lead to extreme volatility in equity markets. There were also questions as to whether the Fed could execute the plan to tame inflation without pushing the U.S. economy into a full-on recession.
The concerns were valid: in 11 of the last 15 rate cycles, the Fed made some type of mistake that caused the economy to falter. But this time has been different. Markets have rallied. Car prices have come down. Sure, it's expensive to buy a home with rates near 7%. But, c'mon, sky-high egg prices came back down to earth. That must count for something.
The Federal Reserve will undoubtedly raise rates a quarter of a percentage point at the conclusion of the July meeting on Wednesday. Do not expect a "mission accomplished" moment from Powell. He and his colleagues will not rest until inflation is closer to their annual target of 2%. At the end of The Last Jedi, Luke (Powell) confronts Kylo Ren and the First Order (Inflation) and allows Rey and the Resistance (U.S. economy) to escape.
Isn't that the ending we all want?
Jermal Chandler, tastylive head of options strategy, has been in the market and trading for 20 years. He hosts Engineering the Trade, airing Monday, Tuesday, Thursday and Friday. @jermalchandler
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