All eyes on the Fed tomorrow … the no-win tradeoff between pain on Wall Street or Main Street … the happy medium that would get us out of this mess … a “can’t miss” event tomorrow

Tomorrow, Federal Reserve members are expected to deliver a quarter-point increase to the fed funds rate.

Earlier in the year, awful inflation data had many traders believing we’d see a half-point rate increase. Those estimates ended when Russia invaded Ukraine, muddying the global economic situation.

So, all expectations are for just a quarter-point hike, which would bump the target range to 0.25%-0.50%.

The more important issue now is language and/or hints about the Fed’s path forward after tomorrow. And on that note, forecasts run the gamut.

***On one end, you have analysts who see the Fed as largely hamstrung

They believe that raising rates more than two, possibly three times this year would inflict too much damage on debt-holders, the investment markets in general, and the economic recovery that’s showing some wobbly knees.

The quick crystal ball on this approach is that only one or two rate hikes won’t hurt the economy or investment markets, but they also won’t do anything to curb inflation.

So, your brokerage account will be happy, but your monthly budget won’t.

On the other end of the spectrum, possibilities include up to – wait for it – the equivalent of 10 quarter-point rate hikes. We get this number by looking at the FedWatch Tool from the CME Group.

Below, we’re looking at what the CME Group tells us about the probabilities of where the fed funds rate will be at the December 2022 Fed meeting.

The far-right probability of 0.1% is for rates to be at 2.50% to 2.75%, implying 10 quarter-point hikes (which, clearly, would mean half-point hikes are on the table). If we pull that back to nine rate hikes, the probability jumps to 7.8%.

If you’re rolling your eyes, thinking that this ballpark range of hiking is absurd, last month, Goldman Sachs suggested that we will indeed see seven increases this year. This is due to the runaway inflation that’s setting 40-year highs.

The quick crystal ball for this route is that such elevated rate hikes could conceivably stamp out inflation. But they would also throw cold water on the economy and send the stock market into a meltdown.

Speaking of which, let’s not forget the last time Powell tried to raise rates, back in 2018.

In January of that year, 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.

Below, you can see the climbing effective funds rate alongside that crash.

Today, the effective Fed Funds rate clocks in at 0.08%. And we’re talking about the potential for raising that north of 2%?

If the market melted down when Powell went from 1.4% to 2.3%, what do you think will happen under a “0% to 2%+” campaign?

So, Powell and company have quite the conundrum…

Option A – more hikes, the risk of a hampered economy, and pain on Wall Street.

Option B – fewer hikes, the risk of historic inflation, and pain on Main Street.

By the way, I should add that this pain on Main Street is growing fast.

Shelter, gasoline, and food are the three biggest components of household budgets. They accounted for 63% of total expenses for the average household in 2020 (the latest data we have).

In February, guess what were the largest contributors to inflation?

You guessed it – shelter, gasoline, and food.

Shelter costs are up nearly 5% over the last year, food is up almost 9%, and gas is up 38%.

***What is the bond market telling us about which route the Fed will take?

It appears that bond traders are expecting the Fed to move on the quicker/more aggressive side.

We can see this by looking at the yield on the 10-year Treasury.

As we tracked here in the Digest, it was only two weeks ago that the yield on the 10-year plunged. This happened in response to the Russian invasion into Ukraine, which caused a global flight to safety.

No more.

As you can see below, investors appear to be doing what they always do… acclimate to geopolitical crises, and return their attention to domestic investment issues. And in this case, that means the Fed and rate policy.

Below, you can see the yield on the 10-year Treasury falling off a cliff as February turned into March. But it’s exploded higher since.

As I write Tuesday morning, the yield sits at 2.1%, which is just under its highest level since July of 2019.

***The happy medium that gets us out of hot water

There’s one potential path forward that helps us avoid the worst-case outcome of both ends of the spectrum:

Falling inflation.

If inflation ebbs on its own, it removes pressure on the Fed to raise rates, so we avoid the heightened risk of damage to the economy and stock market.

Meanwhile, because inflation is dropping, it removes pressure from Main Street wallets.

So, where do things stand on the inflation front?

Yesterday, legendary investor, Louis Navellier, updated his Accelerated Profits subscribers on the matter.

From Louis:

One of the biggest repercussions from the ongoing conflict is inflation spinning out of control.

Food and energy prices, in particular, have skyrocketed recently.

According to the United Nations, worldwide food prices have risen 20.7% in the past 12 months – and they’re only anticipated to increase further in light of the Ukraine-Russia conflict.

Ukraine accounts for 10% of global wheat production, and Russia accounts for 20%. So, food prices are expected to continue to soar higher.

In addition to this, gas prices are obviously way up. Louis adds that they’re above $4.00 per gallon in most of the U.S. and more than $5.00 per gallon on the West Coast.

The latest Consumer Price Index (CPI) showed that the energy index was up a whopping 25.6% year-over-year in February and expected to be even worse in March.

And this morning’s producer price inflation data showed a 10% jump year-over-year.

So, we can’t count on any immediate, steep falloff in inflation.

Yes, as we move deeper into the year, the hope is that supply chain kinks will resolve, which will ease inflation. But we have to temper that hope with the reality of war in Europe, which threatens to further disrupt global energy and food supply chains.

***What’s the answer?

A reminder to join Louis and our macro investment expert, Eric Fry, tomorrow afternoon at 4 PM ET to discuss this very issue.

Louis and Eric will be hosting an important, live event they’re calling Tech Crisis 2022.

The reality is that in the face of historic inflation, geopolitical chaos, and a weak stock market, not all stocks are hurting. As we pointed out in yesterday’s Digest, one example is Tyson Foods, up 25% here in 2022.

The challenge is finding stocks that will perform well in today’s market. That’s the broad theme underpinning tomorrow’s event.

Coming full circle, all eyes are on the Fed tomorrow. Specifically, what can we learn about the rate-path going forward? And what will that mean for Wall Street and Main Street?

We’ll keep you up to date here in the Digest.

Have a good evening,

Jeff Remsburg