Fed Raises Rate: Stock Market Explodes

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The Federal Open Market Committee of the Federal Reserve System, the group that makes the Fed’s decisions on monetary policy, raised the range for the Fed’s policy rate of interest by 75 basis points.

The range for the Federal Funds rate is now from 2.25 percent to 2.50 percent.

The stock market went up.

The Standard & Poor’s 500 Stock Index closed at 4,023.61, rising by 102.56 points for the day.

The Dow Jones Industrial Average closed at 32,197.59, rising by 436.05 points for the day.

And, the NASDAQ closed at 12,032.42, rising by 469.85 points for the day.

Is this the way it is supposed to be?

The Fed tightens up on monetary policy and the stock market goes up?

Well, that is apparently where we are.

Stock Market In Bearish Position

Explanation?

Well, here is one response.

Two major tech companies, Microsoft (MSFT) and Alphabet (GOOG, GOOGL), the parent of Google, reported earnings results that were better than investors expected.

And, Tim Leary, a high-yield bond portfolio manager for RBC Global Asset Management, provides us with a narrative:

“The market is bearishly positioned.”

“Trading volumes have been thin.”

“You get a whiff of good news and it doesn’t take much to have a market rally.”

The responders must be the sophisticated wealthy investors that are still borrowing large amounts of money to take advantage of the short-term actions of the Fed. They are trying to skew the income/wealth distribution more in their favor by playing off the Fed’s policy to come back and inflate stock prices in the near future.

This picture was painted in the post I produced yesterday.

It was a picture of wealthy individuals borrowing lots of money to buy stocks on the downside because they know that the Federal Reserve is going to return to the market soon to underwrite a recovery in stock prices.

After all, this is what the Federal Reserve has been doing for the past forty years.

Well, we will see.

The Fed Chairman

Fed Chair Jerome Powell talks as if this will not happen this time around.

But, past behavior does not lead one to bet strongly that he will keep to his “talk.”

Investors are skeptical.

Here is how Seema Shah, chief global strategist at Principal Global Investors, sees Federal Reserve policy progressing.

“We want to hear what [Fed Chairman Jerome] Powell is thinking about the inflation outlook and what he is thinking about the growth outlook.”

“But we have to be careful.”

“We’ve learned in the last couple of months that we can’t read too much into any broad guidance.”

Well, that’s too bad.

The investment community should not feel that way about the Federal Reserve chairman.

The investment community must have “trust” in the Federal Reserve chairman.

Apparently, at this time, the investment community does not seem to have a broad trust in the Federal Reserve chairman.

And, since Mr. Powell has been the Federal Reserve chairman since February 5, 2018, for a four-year term.

One could strongly argue that, over the past four years, Mr. Powell has earned the reputation he has with the investment community.

He has a record!

And, given this record, Mr. Powell has just achieved reappointment as the chairman of the Board of Governors of the Federal Reserve for another four years.

Going Forward

So, we move on into the future.

The big question out there is about what Mr. Powell and the Federal Reserve are going to do next.

The next meeting of the Federal Open Market Committee meeting is not until September 20 and 21.

The expectation is that the Fed will raise the range for its policy rate of interest another time.

Then we go to November 1 and 2 for the meeting after that.

Another rise?

And what about the Fed’s portfolio of securities?

The Fed has begun to reduce the size of its securities portfolio but this will be a relatively long and arduous task. The Fed is not planning on selling securities in order to reduce the size of the portfolio.

The Fed is going to let securities mature out of the portfolio…and, it will not replace all of the maturing securities.

The plans for this effort go out to 2024.

And, the plans to continue to raise the Fed’s policy rate of interest go out into 2023.

Sounds good, doesn’t it?

But, in terms of market activity, that is a very long time.

Can Mr. Powell and the Fed stay with it?

The Market Says No!

Investors are producing a substantial gain for the stock markets today.

Tomorrow, stock prices could go down.

Next week, stock prices could go down.

Next month, stock prices could go down.

What is haunting is the words of Seema Shah, as cited above,

“We’ve learned in the last couple of months that we can’t read too much into any broad guidance.”

This is not where the Federal Reserve wants to be.

First of all, when the Fed is doing its job well and markets are functioning smoothly, the work of the Federal Reserve is never reported in the newspapers or on TV.

The last thing the Federal Reserve really wants is to be talked about, reported on, and debated over.

In the world we live in today, it seems as if the subject of the Fed comes up in two or three articles in the newspapers, the New York Times and the Wall Street Journal. The subject of the Fed comes up on the evening news. The subject of the Fed is constantly bouncing around the Internet.

The Fed has not performed well in recent years and, consequently, it is always in the news!

And, this is the future we have to deal with.

Mr. Powell and the Fed are going to have to live with this.

The investment community is going to have to live with this.

Mr. Powell’s behavior has only added to the “radical uncertainty” that exists in the marketplace right now.

The Fed raises its policy rate of interest by a historically major amount…and, for the second time in two months…and is expected to raise it again in September.

What is the Fed going to do next?

In a world of radical uncertainty, we can’t identify all the possible outcomes the Fed might come out with.

This is the Fed’s creation, and we, the investment community, have to live with it.

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