Looks Like The Federal Reserve’s Still Pursuing Scrappiness

Looks Like The Federal Reserve’s Still Pursuing Scrappiness
Theodora Lee Joseph, CFA

about 1 month ago2 mins

What’s going on here?

The Federal Reserve (the Fed) kept investors glum by making it clear that rate hikes are still firmly on the table.

What does this mean?

The Fed previously decided against another rate hike when it met in early November, serving up the best early holiday present that investors could’ve asked for. After all, higher rates not only burden the economy by making it more expensive for businesses to invest in themselves, but they also reduce the current value of companies’ future cash flows, pulling down stock prices as a result. In other words, they’re a drag. But because the central bank believes that newly limbered-up supply chains are no longer a cause for higher prices, the Fed said it’s still down to rate hikes to tackle rampant inflation. The International Monetary Fund will approve: the financial agency cautioned central banks against easing up too soon, since inflation’s final stretch can be the hardest to corral.

Why should I care?

For markets: Stocks can’t catch a break.

Investors quickly piled into stocks when the Fed paused hikes earlier this month, won over by the prospect of higher valuations. But this latest announcement snuffed out those hopes as quickly as they were sparked. That, at a time when investors are already especially wary: US investors pulled more cash out of stocks in October than in any other month over the last two years.

Cumulative capital flows
Source: Bloomberg

The bigger picture: Flat rates are the best of a bad bunch.

It’s a desperate time when investors celebrate rates staying high. Sure, it’s better than them floating higher, but their current level is still fierce enough to cause damage. Just look at the US’s debt pile: spicy rates mean monthly payments on the $33 trillion deficit are through the roof. If the government can’t keep up, it’ll need to borrow even more, raise taxes, or print more money. Problem is, that last option will encourage companies to pull prices even higher.

US debt pile interest cost


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