The Fed talks a big game about rate hikes … Larry Summers sees a “major” recession on the way … what to do about it in your portfolio

A quick thanks to everyone who turned out for yesterday’s Tech Crisis event with expert investors, Eric Fry and Louis Navellier.

It was one for the record books, with over 230,000 having signed up to be a part of it. If you missed it, you can watch a free replay by clicking here. You’ll walk away with a far greater understanding of global markets today, and more importantly, what to do about it in your portfolio.

Because of the early publish-timing of yesterday’s Digest due to the event, we weren’t able to cover the outcome of the Fed meeting.

So, what was the broad takeaway?

Well, looking at 2022 as a whole, the Fed was more hawkish than expected. And it looks like they’re coming to terms with the potential need of sacrificing growth for lower inflation.

***As was widely expected, the Fed raised the fed funds rate by just a quarter-point

This hike is the first step in a rate hiking cycle intended to curb the historic inflation that’s burning through the wallets of Main Street Americans.

Of course, just a quarter-point hike will be about as effective as throwing a glass of water on a forest fire.

So, where’s the hawkishness?

It came via the Fed’s projections that we’ll see six additional hikes by the end of the year.

From CNBC:

Federal Reserve officials expect to hike rates roughly six additional times this year, bringing its benchmark interest rate to nearly 2%, according to projections released Wednesday.

The median member of the Federal Open Markets Committee expects the Fed Funds rate to be 1.9% at the end of the year, according to the release. 

This is a huge jump from the last Fed meeting in December, which showed the majority of Fed members expected a total of just three hikes in 2022.

The difference between then and now?

You guessed it – inflation.

Back to CNBC:

The committee members also raised its expectations for inflation.

PCE inflation projections now come in at 4.3% in 2022, followed by 2.7% in 2023 and 2.3% in 2024. The committee previously projected 2.6% in 2022, followed by 2.3% in 2023 and 2.1% in 2024.

The Fed also cut economic growth expectations, forecasting 2.8% GDP growth in 2022. In December, the committee’s median projections called for 4.0% economic growth in 2022.

As to the issue of the Fed’s colossal balance sheet, Fed Chair Jerome Powell punted. He said the central bank will begin to reduce its $9 trillion in bonds at “an upcoming meeting.”

The stock market responded positively to the news after a brief dip.

Stocks were up solidly going into the Fed announcement. After the decision, the Dow and the S&P gave up all their gains and went negative. The Nasdaq also gave up big gains but stayed positive.

However, as the trading session continued, all three indexes rallied, ending the day up strongly. The Nasdaq led the way, closing up 3.8%.

***Why were stocks up when the number of projected rate hikes for 2022 is obviously not great for stocks?

Well, any time that even a sight overhang of uncertainty is removed from the market, Wall Street tends to cheer. It’s one less unknown.

And in this case, the Fed mapped out what it plans to do for the rest of the year. Sure, plans can change. But this is the Fed showing us their cards, which enables professional money managers to position their portfolios accordingly.

Here’s more from our hypergrowth specialist and editor of Innovation Investor, Luke Lango:

Stocks haven’t been falling because the Fed is going to hike rates. They’ve been falling because of the uncertainty surrounding the forward path of monetary policy.

The market can deal with rate hikes. Indeed, during these previous cycles, the stock market performed strongly.

But what the market cannot deal with is uncertainty, and Fed policy has been marked by substantial ambiguity over the past few months. Investors have had no concrete idea as to how the Fed was going to manage monetary policy against the backdrop of slowing economic growth, a war in Europe, Covid-19 lockdowns in China, and decades-high inflation that will likely get worse.

Against all that uncertainty, stocks have struggled.

Now, though, that has been replaced with certainty. (Yesterday’s) statement made it abundantly clear that so long as inflation remains red-hot, this Fed will combat it with rate hike after rate hike.

The proverbial Band-Aid has been ripped off. 

And now that we know what the Fed is going to do, the market can benchmark valuations against that policy path. And stocks can move higher on the back of positive earnings growth.

Yesterday’s gains also likely reflect optimism based on Powell’s assessment that the economy is strong enough to handle the forthcoming rate hikes.

Specifically, Powell downplayed the threat of a recession, saying “in my view, the probability of a recession within the next year is not particularly elevated.”

I hope Powell is right, but the risk of recession has increased substantially in recent months.

In fact, former Secretary of Treasury Larry Summers, who repeatedly warned about inflation, says that Powell is now steering the U.S. economy toward a “major” recession.

***Too little, too late to avoid a recession?

Yesterday, Summers penned an opinion piece for the Washington Post. From that article:

…I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely.

The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession.

The most brutal part of Summers’ critique focuses on the Fed’s wildly-wrong economic forecasts, as well as its inability to change course in a meaningful way.

Back to Summers:

A year ago, the Fed thought inflation would be in the 2 percent range for the next year.

Six months ago, it was expressing optimism that inflation was transitory.

Two weeks ago, it was still buying mortgage-backed securities even as house prices had increased by more than 20 percent.

No explanation has been offered for these rather momentous errors. Nor is there any suggestion that the Fed forecasting procedures or the personnel that produced them will change.

Indeed, the most important change in the March Monetary Policy Report to Congress was in the wrong direction — the removal of the discussion of the various monetary policy rules that had suggested policy was dangerously loose.

So there is little basis for confidence in the Fed’s assessment of inflation risks.

With extraordinarily tight labor markets getting tighter by the best available measures, and wage inflation running at 6 percent and accelerating, high inflation was a major risk even before the events of recent weeks.

We now face major new inflation pressures from higher energy prices, sharp run-ups in grain prices due to the Ukraine war, and potentially many more supply-chain interruptions as covid-19 forces lockdowns in China.

It would not be surprising if these factors added three percentage points to inflation in 2022. And with price increases outstripping wage increases, a wage-price spiral is a major risk.

***So, what’s the playbook from here?

As we noted in Tuesday’s Digest, the last time Powell and company attempted to hike rates quickly, it ended poorly for stocks.

In January of 2018, the effective fed funds rate stood at 1.41%. By December, Powell had pushed it to 2.27%. At that point, the market said “enough” and promptly crashed about 20% top-to-bottom.

Yesterday’s Fed meeting suggested we’ll be moving from an effective fed funds rate of 0.08% to 1.9% just nine months from now.

So, double the amount of hiking in about a quarter less time compared to 2018.

How do you position your portfolio in such a way that it’s more resistant to a pullback if we see a repeat of 2018, yet also capable of climbing if the markets prove resilient?

Well, that’s a large part of what Eric and Louis discussed in yesterday’s event. It’s absolutely worth a watch if you missed it.

By the way, they gave away not one but two free stock recommendations. Again, to watch that free replay, just click here.

We’ll keep you updated on rates, inflation, and recession risk here in the Digest.

Have a good evening,

Jeff Remsburg