Fed Setting Up U-Turn


"Shock" Fed Pivot Appraoch

The Federal Reserve is talking tough…

Few are buying it though. 

History says the tough talk isn’t going to result in any tough action either. 

Here’s why and why a major “pivot” move is coming from the Fed far sooner than most expect.

Talk Is Cheap

The Federal Reserve recently revealed that it is expecting two more rate increases before the end of this tightening cycle. 

At first, they just might seem delusional enough to feel that’s right. 

Just listen to their own backpatting from a few days ago. 

This week the Fed chairman said, “We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”

There’s a lot to unpack there. 

But it’s all super-coded Fed doublespeak.

We don’t put much weight into it and you shouldn’t either. 

Instead, we focus on the tangible market probabilities from the FedWatch Tool.

This tool incorporates interest rate futures contract data to determine the market’s best estimate of probabilities of future Fed moves. 

It’s the best way to predict the Fed’s next move.

And, long story short, the market is buying the tough guy Fedspeak about two more rate hikes. 

For example, the probability of the Fed’s rate set at or below current levels by year end was 59% before the latest Fed announcement. 

After the stay-tough-on-inflation announcement about more rate hikes, the probability of rates ending the year at current levels actually increased a bit to 62%. 

The reason to not buy into any of this is the money supply.

The money supply is the most consequential trend in finance today. 

And right now it continues to signal that inflation is over and deflation is not just setting in, but accelerating. 

Here’s the chart of the M2 Money Supply:

The trend is down and the Fed’s current rate positions are only pushing it down further and faster.

This will eventually lead to a neck-breaking speed pivot from the Fed because deflation will cause economic mayhem far greater than what has been felt over the last couple of years.

Same Playbook

That’s why we have a different prediction for the Fed’s next move. 

The Fed may dither around for a few more meetings. 

They may keep up the talk. 

But they are going to have to pivot sooner than later. 

One major market decline or major economic weakness will send them running back to the printing press.

It always has before and there’s no reason not to expect them to do so again. 

The most successful investors will prepare for this outcome now.

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